Cash flow for construction companies is likely to improve in 2016-17 as most of the orders procured in the last two years are expected to be executed this fiscal, says a study by India Ratings (Ind-Ra).
According to the study, companies in the construction sector continued to witness negative cash flows from operations in 2015-16, which is likely to improve gradually to near zero levels this fiscal as more orders procured during the last two years are executed.
"Competitive intensity had reduced for new orders over the last two years and hence margins on such orders are expected to be higher," the ratings agency said.
Order inflow in the construction sector is likely to grow as the government has increased outlay for highways and railways in the Union Budget 2016-17.
The government increased allocation for highways by 28 per cent and targets to award 10,000 kms of highways in 2016-17.
The government has also laid out ambitious targets for spending on other infrastructure sectors like irrigation, drinking water supply, housing and power supply.
"Prudent accumulation of orders with close correlation between capacity to execute and order book size will be crucial to improvement in the cash flows and credit metrics of individual companies," it said.
Ind-Ra further said it expects companies to focus on margins and funding while bidding for new projects and to limit their order books near the current level as a multiple of revenue, which will provide for a moderate growth in revenue along with improvement in cash flow margins.
According to the agency, the negative cash flows from operations are a legacy of the aggressive bidding seen during FY10-FY12, when companies focused on building their order books.
"In such orders, EBITDA margins were very close or even lower than retention money margins in some cases, leading to negative operational cash flows. Also, the companies did not focus on funding by the customer, resulting in long receivables and inventory holding periods," the study said.
It further said construction sector's receivable days has widened by 33 per cent to 141 days and inventory holding period has risen by close to 9 per cent to 124 days in the last five years.
"Construction sector is likely to see gradual improvement in FY17, even as liquidity remains weak due to negative cash flows," Ind-Ra said.
