Infra companies may see margin recovery from Q2FY27 as cost pressures ease: Report
New Delhi, August 19
Infrastructure companies could see a recovery in margins from the second quarter of FY27 as project execution picks up and cost pressures ease, despite near-term margin pressure from higher input costs, a report by Centrum said.
The report said that while the near-term impact of higher costs has affected margins, companies have retained their FY27 outlook, indicating that the current pressure is expected to be temporary.
It stated, "Despite the near-term cost-led margin softness, companies broadly reaffirmed their FY27 guidance on revenue, margins and order inflows, with management expecting margin normalization from 2QFY27 onward".
The report said the infrastructure sector's performance in Q1FY27 was mixed, with companies witnessing strong order momentum while profitability remained under pressure across most players.
Revenue growth also varied across companies. Some infrastructure players reported strong double-digit growth as execution gathered pace, while others recorded more modest growth due to temporary challenges.
These challenges included site-level restrictions, delays in approvals, labour shortages and slower ramp-up of recently won orders, according to the report.
On the profitability side, EBITDA margins came under pressure during the quarter due to several cost-related factors.
The report cited commodity inflation, higher royalty and input costs, geopolitical-led material inflation and elevated employee expenses linked to pre-emptive capacity building for large upcoming projects.
However, not all companies saw margin pressure. A few players reported margin expansion, helped by operating leverage and forex gains, the report said.
Despite the pressure on profitability, the overall order position of the infrastructure sector remained strong. Closing order backlogs across the sector remained at all-time high levels, supported by strong order inflows during Q1 and robust tender pipelines.
The healthy order book provides infrastructure companies with visibility for multi-year revenue growth, according to the Centrum report.
The report also noted that balance sheets across the sector remained comfortable. Several companies continued to maintain low leverage or net-cash positions, which could support their ability to bid for larger projects.
The combination of strong order books, healthy tender pipelines and relatively comfortable balance sheets provides a positive backdrop for the sector despite the margin pressure seen during the first quarter.
Importantly, infrastructure companies broadly maintained their FY27 guidance on revenue, margins and order inflows despite the near-term cost pressures.
Management is expecting margins to normalise from 2QFY27 onward, as project execution scales up and cost pressures ease, the report highlighted.
The expected improvement in margins is linked to the ramp-up in execution. Companies that faced slower project execution during the first quarter due to approval delays, labour shortages or other temporary factors could see better performance as these issues ease.
— ANI
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