CRISIL SME TRACKER: Margins of SME players in road sector may remain stable in FY25
Total capital expenditure in the road sector (capex), comprising national highways, state highways and rural roads, is expected to grow 8-13 percent in financial year 2025 (FY25), driven by higher execution.
The share of state roads accounts for about 50 percent of the total investments in the road sector.
This share of small and medium enterprises (SMEs) in this segment is around 60 percent and this segment contributes around 60-70 percent to the total revenue of SMEs in the road sector.
From the low FY21 base, state road spending grew 21 percent in FY22 and is expected to have grown by another 10-13 percent in FY23, broadly in line with fiscal spending growth.
In FY 2024, state expenditures are expected to increase further by 8 to 12 percent as the percentage of realizations of budget allocations is expected to be broadly in line with historical averages.
As a result, SME players’ revenues are expected to grow 5-10 percent in fiscal 2025, driven by higher execution. This would come on the back of the 8-12 percent revenue growth likely seen in FY24.
The margins of the small MSME players were squeezed by 150 to 250 basis points (bps) and contracted to 6 to 8 percent in FY23 due to exorbitantly high commodity prices. With prices of key raw materials cooling down, players’ margins are expected to recover and increase by 100 to 200 basis points in FY24. Margins are likely to remain stable in FY25 due to stable commodity prices.
Liquidity conditions are also expected to improve as liquidity measures under the Atmanirbhar Bharat scheme have been extended till March 2024, and payments by state authorities are also becoming more punctual.
First print: June 27, 2024 | 1:24 hours IST