The ongoing liquidity crisis in the real estate industry has hurt construction activities badly, directly impacting engineering, procurement and construction (EPC) players.
Competition from large players, exposure to business cycles, and high working-capital intensity are key risks in the EPC segment, which is highly fragmented, with small and medium enterprises (SMEs) accounting for three-fourths of the market.
The first half of FY21 saw developers deferring new launches and focusing instead on completion, given customers’ preference for “ready to move in” units.
This is estimated to have slashed the order book of EPC players by 70-90 per cent in H1, FY21. For allied industries such as cement and building material, the pace of decline is likely to have been slower, as these also serve other infrastructure projects.
EPC players’ working capital requirements are expected to remain high, as they typically have to offer extended credit periods to developers. They also need to maintain deposits with developers as a guarantee for timely
he credit crunch among developers will only lead to higher receivable days, and hence, higher working-capital days for EPC players. Working-capital days have remained stretched for them over the past couple of years as well.
EPC players’ revenues are expected to decline in FY21 owing to lower construction activities. Margins of EPC players in the highly competitive contracting and sub-contracting segments are already relatively low. Lower demand and high cost (mainly of labour) will squeeze them further this fiscal.
Though some cities are seeing an uptick in demand in recent months, the segment is expected to remain under pressure in FY21. Its performance in the second half of this fiscal will therefore be a key monitorable.