SME EPC road contractors face shrinking margins as input costs spike

Road contractors from the small and medium enterprises (SME) segment undertaking projects via the engineering, procurement and construction (EPC) mode are expected to see continued growth momentum in 2022-23 (FY23) on higher award of national highway contracts and sustained state spending. Steps under Aatmanirbhar Bharat to ease liquidity will also support revenue growth.

However, national highway projects are typically executed by large contractors, with only a small proportion sub-contracted to SMEs. Still, higher spending by state governments will ensure revenue increase of 10-15 per cent year on year for SME contractors, as it accounts for 60-65 per cent of’ their revenue. 

State spends rebounded 20-25 per cent in FY22, and are projected to rise a further 8-10 per cent in FY23, given the recent state budget announcements.
 

A further increase in revenue of SME EPC road contractors, which comprise 35-45 per cent share of the overall roads and highways sector, is expected to be truncated on moderation in awarding of rural road projects under the centrally-sponsored Pradhan Mantri Gram Sadak Yojana or state schemes, such as Mukhya Mantri Gram Sadak Yojana.

While these are primarily executed directly by SME EPC road contractors, awarding is expected to moderate as only 70,000-75,000 km of the target under the scheme is pending to be executed, as compared to over 2,00,000 km executed over the last five years.

Meanwhile, the operating margin of SME EPC contractors is expected to be under pressure, as prices of commodities such as bitumen have rallied more than 50 per cent over the past six months. Continuation of such input-cost pressures is expected to clip their margins by about 200 basis points in FY23.

Meanwhile, the operating margin of SME EPC contractors is expected to be under pressure as commodity prices such as bitumen have rallied more than 50% over the past six months. Continuation of such input-cost pressures are expected to clip their margin by about 200 basis points this fiscal.