Investments in construction sector to see 12-16% dip in FY21: Crisil report

Investment in Indian construction industry is likely to witness a 12-16 per cent decline to nearly Rs 7.3 trillion during the current fiscal year, as Covid-19 pandemic has severely impacted the economy and liquidity scenario, Crisil said.

According to the rating agency, the economy, which has been facing external risks such as weak global demand, supply disruptions and global financial shocks, now faces factory shutdown, reduced discretionary spending and delayed capex cycle.

"The construction industry, which mirrors the economy, is expected to take a huge blow from all this. As a result, a 12-16 per cent contraction in construction investment is expected this fiscal to Rs 7.3 trillion from Rs 8.6 trillion in FY2020," the agency said.

The decline in investment factors in lower capex by central and state governments due to diversion of funds towards healthcare, public welfare and social obligations.

"This is at a time when their finances are already strained and gross budgetary support to infrastructure is expected to decline due to lower revenue receipts. Budgetary allocation to infrastructure by the central government for the fiscal is lower compared with fiscal 2020," it said.

The budgetary allocation by the Centre for fiscal 2020-21 for the sector witnessed a 7 per cent decline over the revised estimate for fiscal 2019-20, even as the proportion of gross budgetary support increased to 41 per cent of the total budgetary allocation in FY'21 from 35 per cent in FY'20.

"The pandemic and the subsequent lockdown will impact government revenue receipts as direct and indirect tax collections are expected to be hit with the reduction in economic activity.

"States' infra allocations had fallen even before the pandemic struck. The turmoil in the global economy and financial markets would also impact the external borrowing capability of the central and state governments," it said.

The share of private spending has already fallen from 26 per cent in fiscal 2010 to 17 per cent in fiscal 2020 as publicprivate partnership (PPP) models have failed to take off in most infrastructure sectors, except airports and roads, due to private entities having to bear majority of the risks in this model, Crisil said.

According to the agency, with construction activities deferred, players in the construction sector are expected to log a 13-17 per cent drop in revenue in fiscal 2021.

"What's worse, their EBITDA margins are estimated at 4-6 per cent for the fiscal, down from 7-9 per cent expected in the preceding one," it said.

The agency noted that due the continuing lockdown, labour issues and supply chain disruptions, the current quarter will be a washout.

"The government has allowed construction of roads in rural belts and irrigation and renewable energy projects in virus-free zones. However, construction companies face challenges in arranging transportation and accommodation for labour, maintaining social distancing at construction sites, obtaining clearances from district officials for intra- and inter-district projects, and ensuring raw material availability," it said.

Industries such as transportation, quarrying, steel, cement and forging need to be up and running for meeting the raw material requirements of the construction sector, Crisil said.

Besides, workforce issues and need to have permits and clearances in place before resuming construction will lead to the sector taking time to return to normalcy even after the lockdown is lifted.

"The bulk of construction activity, therefore, will likely resume only in the third quarter this fiscal," it said.