While the long term outlook for the Indian Construction sector continues to remain encouraging, companies in the sector could witness near-term challenges on account of sluggishness in new order inflows, execution concerns surrounding their current order-books, elongated working capital cycle and resultant increase in debt levels, says leading credit agency, ICRA Limited.
While there has been an improvement in the quantum of new projects announced by the government sector in H1 FY 12, this was countered by a sharp drop in new project announcements by the private sector in the same period, with the steepest decline in Q2 FY 12. Resultant, new order inflow for companies in the sector has been muted over the past two quarters.
Despite having healthy unexecuted order books, almost all construction companies are plagued by a number of slow-moving orders due to issues related to land acquisition; securing requisite clearances; labour shortage and other sector specific issues such as payment issues plaguing irrigation projects in Andhra Pradesh and issues faced by power projects. The slowdown in the pace of execution can be gauged by the quantum of stalled projects, which has been steadily increasing since September 2010. As of September 2011, the quantum of stalled projects increased by 42% on a y-o-y basis (15% on q-o-q basis). Consequently, the y-o-y revenue growth of construction companies in Q1/Q2 FY 12 has been the slowest as compared to the past few years. The reduced pace of execution is also evidenced by the significantly lower y-o-y growth of 2.7% (at FY 05 prices) in construction GDP in H1 FY 12 as compared to 7.2% y-o-y growth in H1 FY 11.
The Reserve Bank of India’s (RBI) move to raise benchmark interest rates on multiple occasions since March 2010 has increased the overall cost of borrowing. Companies have also suffered elongated working capital cycles due to delays in realizing payments from clients; piling work-in-progress due to delayed certification by clients and the need to support sub-contractors to ensure continuity in project execution. Labour shortages and government welfare schemes such as the National Rural Employment Guarantee Scheme have resulted in higher labour costs. Slower pace of execution and higher input and labour costs affected the operating profits of construction companies while high interest costs associated with higher debt levels dented their net profits.
Mr. Rohit Inamdar, Sr. Vice President & Head-Corporate Sector Ratings, ICRA, says, “Companies in the construction sector could face challenges over the short term considering sluggishness in new order inflows, execution-concerns surrounding their existing order-books, elongated working capital cycle and consequent increase in debt levels and rising interest costs. However, long-term opportunities in the sector continue to be strong, considering the large planned investments in infrastructure that are necessary to support the needs of the rising population and high expected growth rates of the Gross Domestic Product. Recent policy initiatives such as creation of Infrastructure Debt Funds and the role of India Infrastructure Finance Company Limited assume importance and could channelise long-term debt funds to the infrastructure sector”
For a detailed note “Indian Construction Sector: Challenging Short-Term Outlook On Intensifying Execution Risks”, visit our website www.icra.in
