India Ratings and Research has maintained a stable outlook on the construction sector for 2017-18 and expects the liquidity position for the sector to improve further.
"India Ratings and Research (Ind-Ra) has maintained a stable outlook on the construction sector for FY18, driven by the expectation that the slow but steady increase in revenue and improvement in EBITDA margins seen during FY16 and 1HFY17 will continue in FY18," the rating agency said in a statement.
The sector is likely to witness a gradual improvement in credit metrics, although constrained by the companies under debt restructuring showing no signs of recovery, the ratings agency said.
"The sector has seen improvement in liquidity position, with a significant improvement in cash flow from operations (CFO) in FY16, although it continued to remain negative. Liquidity is likely to improve further, with CFO improving over FY17-FY18 to reach near-zero levels," Ind-Ra said.
A positive cash flow is imperative for the sector to fund its working capital, as bank credit growth to the sector plunged over FY16-FY17, it said, adding that maintaining improvement in cash flows over the medium term, however, would depend on a prudent accumulation of orders.
The ratings agency expects order inflow to grow in next financial year primarily driven by increased public investment in transport and urban infrastructures, power transmission, and water and irrigation projects.
"The overall allocation for roads, housing and electrification increased 18 per cent yoy in the Union Budget 2017-18," it said.
It, however, highlighted that the allocation for the National Investment and Infrastructure Fund continues to be low. "The fund was expected to leverage the initial funding multifold for investment and provide a stimulus to the infrastructure sector, which will not happen in FY18."
The sale of public private partnership projects in the roads sector has increased significantly during 2016, which is likely to continue in 2017.
Ind-Ra said this may aid in deleveraging of balance sheets of construction companies. However, this will continue to remain a buyers' market, given the significant demand and supply mismatch, it added.
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