EPC players’ profitability highly susceptible to commodity price swing: Ind-Ra

New Delhi, July 22 (SocialNews.XYZ) The engineering procurement and construction (EPC) companies have been in the doldrums majorly on account of a rise in steel and cement prices, said India Ratings and Research.

However, the credit ratings agency said the impact of the second Covid wave on the execution profile is marginal.

Accordingly, the EPC sector witnessed a decline in the EBITDA by 10-12 per cent YoY in FY21, majorly on account of a decline in the revenue coupled with an increase in manpower management costs and commodity prices.

"The EPC sector had seen a recovery in 2HFY21, after getting impacted in 1HFY21. Ind-Ra in its Construction Outlook for FY22 had estimated revenue growth of 15-20 per cent YoY for EPC players, backed by a demand recovery along with the size of the unexecuted order book."

"Ind-Ra believes that the second Covid wave may not result in a change in Ind-Ra's earlier estimates, given that 1Q is generally a lean season for the EPC sector coupled with absence of any country-wide lockdown."

As per the Ind-Ra, the cost of raw materials (CORM) would constitute around 60 per cent of the revenue for EPC companies in FY22.

"However, though this proportion would vary based on the subsegment and the subcontracting expenses, generally high rated players have 'CORM' in the range of 55-57 per cent against low rated players which have a higher 'CORM' at 70-72 per cent."

"This variance is majorly on account of the ability of high rated players to perform complex projects which would contribute higher margins compared to low rated players who are majorly into subcontracting the portion of works generating lower margins."

Notwithstanding, it said that high rated entities would have better ability to subcontract on a back to back basis which would result in higher ability to pass through the volatility in raw material prices than lower rated players.

"The EPC sector has been facing the brunt of increase in domestic steel prices since FY21. Typically, the order book visibility of the EPC sector ranges between '2.5x-3x' of revenues. EPC players usually try to build in increases in raw material prices in their bids by estimating fluctuations based on past trends which makes them susceptible to any sharp price surges."

"The recent surge in steel prices is a cause for greater concern for players who have a substantial quantum of unexecuted order book, awarded prior to FY21."

According to the report, cement realisations increased marginally by around 2.1 per cent in FY21, majorly on account of supply-side disruptions due to Covid-led lockdowns.

"Thereafter, the prices got stabilised due to an increase in demand on account of a revival in the infrastructure segment."

Source: IANS