To hedge themselves from the uncertainty in steel prices, a few engineering procurement and construction (EPC) players in the highways sector have started negotiating with the domestic steel majors for fixed-price annual contracts.
Concerned about the rising cost of the raw material, some of them have requested the ministry of road transport and highways (MoRTH) to consider the inclusion of cost escalation clauses for projects awarded before FY21, India Ratings said in a report.
According to India Ratings, the average domestic steel prices surged 26% y-o-y in FY21 and 23.5% in Q1FY21. The prices reached record levels of Rs 56,000/MT in May 2021 and dipped to Rs 52,000/MT in June 2021.
The EPC sector, which already witnessed a 10-12% decline in their earnings before interest, taxes, depreciation and amortisation (Ebitda) last fiscal mainly due to decline in revenue coupled with increase in manpower management costs and commodity prices, are worried with the rise in steel prices.
The rating agency said EPC players with a higher quantum of unexecuted order book prior to FY21 and low ratings remain susceptible to steel price fluctuations and may see significant erosion in their margin profiles which could weaken their credit profiles in short to medium term.
“EPC players usually try to build in increases in raw material prices in their bids by estimating fluctuations based on past trends which makes them susceptible to any sharp price surges. The recent surge in steel prices is a cause for greater concern for players who have a substantial quantum of unexecuted order book, awarded prior to FY21,” India Ratings said.