New project inflows for construction sector to improve in 2020: Icra

The new order inflows for construction companies will improve in 2020 with a huge pipeline of projects in the infrastructure sector, rating agency Icra said on Tuesday.

Assigning a stable outlook for the construction sector, Icra however said delays in land acquisition, funding issues, and state government priorities pose threat to new order inflows.

"Icra has given a stable outlook for the construction sector. With a huge pipeline of projects to be awarded in the infrastructure sector, Icra expects the new order inflows for construction companies to improve in CY (calender year) 2020," it said.

As the government plans to more than double the investment in infrastructure sector to about Rs 100 lakh crore over the next five years, the construction companies are likely to witness significant opportunities with key segments being highways, railways, ports, urban infrastructure and airport.

In the railways segment, besides the core railway capex (doubling, new lines, signalling, electrification, etc), the station redevelopment is expected to provide significant opportunities to the construction companies, the report said.

Similarly, in the highways sector, adequate pipeline of projects for development/upgradation of national highways and state highways exists. The Bharatmala Pariyojana itself is expected to provide large opportunities for the construction sector as the programme is the largest road development programme in India.

The rating agency also said delays in land acquisition, funding issues, and state government priorities remain key risks to the new order inflows.

The order inflows from non-infrastructure segments like industrial and real estate (excluding affordable housing segment) are expected to remain muted, with weak private sector capex growth, it said.

"The order inflow for construction sector has been robust over the last few years, supported largely by increased government spending towards infrastructure.

"However, H1-FY2020, has witnessed lower new order inflows and cancellations of some orders in Andhra Pradesh, which has resulted in a decline in order book for some players. Nevertheless, the order-book position of most of the construction players is currently adequate to provide medium term revenue visibility," Icra said.

On the execution front, Icra expects the healthy order-book should support growth in operating income of construction companies in the first half of 2020, though it could witness moderation if the new order inflows weaken.

However, construction companies which have leveraged balance sheets and stalled or slow-moving projects, would continue to face challenges.

As for financial health, operating profitability is expected to remain stable with the benefits of benign inflation and steady execution; though this would also be dependent on any steep variation in key raw-material and labour cost. However, the capex and working capital requirement could absorb most of the cash accruals.