Infrastructure Boom To Drive 12-15 Per Cent Growth In Construction Sector, Says ICRA
April 30th, 2024
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India's real estate construction sector is poised for continued growth, according to a recent report by credit rating agency ICRA. The report, titled "Indian Construction Sector: Maintaining Growth Momentum," predicts a revenue increase of 12-15 per cent for construction companies in FY2025 (fiscal year ending March 2025). This positive outlook comes on the heels of a stellar 18-20 per cent growth witnessed in FY2024.
Government Spending Fuels Industry Growth
A key driver of this growth is the government's significant investment in infrastructure projects. The FY2025 budget allocated Rs 11.1 trillion (USD 163.8 billion) towards capital expenditure (capex) in infrastructure, representing a substantial 16.9 per cent year-on-year increase. This increased spending on roads, bridges, metros, and other infrastructure projects creates ample opportunities for construction companies.
Healthy Order Book Signals Strong Demand
ICRA's analysis of its sample set of construction companies reveals a healthy order book-to-sales ratio of around 3.9x as of December 2023. This indicates a robust pipeline of projects that will translate into revenue growth in the coming years. While growth is expected to be slightly lower than the previous year due to a high base effect, the outlook remains optimistic.
Profitability to Improve Despite Challenges
ICRA also expects construction sector margins to expand by 25-50 basis points (bps) in FY2025. This improvement is anticipated due to factors like operating leverage benefits and a projected stability in commodity prices. However, the report acknowledges that intense competition persists in certain segments, potentially limiting profitability gains. Overall, profit margins are likely to remain below pre-pandemic levels (around 14 per cent) in the medium term.
Working Capital Requirements Expected to Increase
The expiry of the Atmanirbhar Bharat scheme, a government initiative that provided relief to contractors during the COVID-19 pandemic, is expected to impact working capital requirements for construction companies in FY2025. This scheme offered benefits such as monthly billing frequency and lower bank guarantee requirements. Despite this challenge, ICRA anticipates comfortable coverage metrics for the sector, with interest cover likely to stay above four times.
Conclusion
ICRA's report paints a promising picture for India's construction sector in FY2025. Backed by government spending on infrastructure and a healthy order book, construction companies can expect to see continued revenue growth. While profitability may not reach pre-pandemic levels yet, margins are expected to improve due to operating leverage and stable commodity prices. The upcoming year presents a positive outlook for the construction industry, playing a crucial role in India's overall infrastructure development.
Source: timesproperty.com
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