The government’s push on infrastructure with a higher budget allocation and economic recovery will increase the revenues of engineering and capital goods companies by 15-17% this fiscal year, more than offsetting a 3% contraction in the previous fiscal year. .

In addition, better coverage of fixed costs will lead to a 50 basis points (bps) improvement in operating margins, according to Crisil Ratings. Rises in commodity prices are passed on late.

As working capital requirements increase, higher cash generation and prudent capital spending (capex) will keep credit profiles stable, shows Crisil Ratings analysis of 42 companies with overall revenue of Rs 1.30 lakh crore and accounting for around 55% of industry revenue.

Anuj Sethi, senior director of Crisil Ratings, said the backlog of engineering and capital goods companies remains healthy at Rs 2.3 lakh crore (1.7 times revenue in fiscal 2021).

“Orders in sectors such as industry, infrastructure, railways, construction and mining equipment are on the rise, while those in the power and heavy power sectors remain sluggish. Net-net, a resumption of execution after Wave 2 is expected to support revenue growth this year.

“In addition, a 26% increase in the budget allocation for infrastructure bodes well for order flow. growth in the turnover of engineering and capital goods players.

Another boost will come when private sector spending in other sectors, including to reap the benefits of the production incentive scheme, begins.

Operating margins are expected to increase by 50 basis points to 10% this year, supported by less severe bottlenecks (compared to last year) and better operating leverage. The delayed transmission of rising commodity prices, especially metals, will also help.

Tanvi Shah, associate director of Crisil Ratings, said working capital borrowing is expected to increase as income increases. Nevertheless, the weakening of better cash generation and moderate investments (due to a sufficient capacity margin) will support credit profiles.

The debt / earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratios of the players are expected to improve to 1.8 times and more than 6.5 times this year compared to more than twice and five times respectively. the previous exercise.

However, Crisil said, the pace of the resumption of the investment cycle, the ability to manage working capital and the possible impact of a third wave of the Covid-19 pandemic will be one to watch.