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Construction companies will see revenue erosion as a result of the countrywide lockdown. Typically, fourth-quarter accounts for 30-35 per cent of the annual revenue of construction companies; of which a month’s lockdown can erode 8-10 per cent, according to India Ratings and Research.
"The lockdown imposed by the state governments of some of the large Indian cities to contain the COVID-19 outbreak would obstruct the execution of infrastructure construction in them. This would impact the revenue growth of construction companies in the near term," India Ratings said.
The agency believes that construction activities across cities such as Mumbai Metropolitan Region, Delhi, Pune, and Bangalore are likely to be stalled or progress at a significantly slower-than-anticipated pace for a major portion of March 2020 which may continue in April as well.
Companies with significant ongoing construction work in such cities are the ones likely to be the most affected, as they are turning out to be the epicentre of the outbreak.
Furthermore, a large chunk of construction workers who are heading to their home towns in the interiors of the country are likely to return only after the situation normalises, which can even be a month from now or even later. Consequently, the revenue trajectory is likely to be affected. Besides, continued expenditure in the form of overheads and finance charges is also expected to affect the profitability of construction companies, owing to a lower base for the absorption of these overheads.
India Ratings and Research had revised the outlook on the construction sector to negative from stable for FY21, on account of the expectations of muted order inflows in a few sub-sectors and significant risks emerging from the exposure of certain construction companies to the state governments of Andhra Pradesh, Telangana, Tamil Nadu and Uttar Pradesh.
Furthermore, with the funding woes of the banking sector and the overall fragile economic scenario, the agency expects the disbursements and sanction of additional limits to construction companies over the next few months to happen at a sluggish pace.
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