ICRA maintains stable year-end outlook for construction sector

V Rishi Kumar Hyderabad | Updated on December 24, 2019 Published on December 24, 2019

Credit profile of most construction players to remain stable

Rating firm ICRA has projected a stable outlook for the construction sector, in its year-end assessment of the sector.

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

The first half of FY20 has witnessed lower new order inflows and cancellations of some orders in the state of 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.

As the Government plans to more than double the investment in Infrastructure to about Rs 100 trillion 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 highways sector, there is adequate pipeline of projects for development/upgradation of the national highways and state highways. The Bharatmala Pariyojana project itself is expected to provide large opportunities for the construction sector as the programme is the largest road development programme in India, ICRA in its report observed.

With a huge pipeline of projects to be awarded in the infrastructure sector, the new order inflows for construction companies is likely to improve in CY2020. However, according to ICRA delays in land acquisition, funding issues, and State Government priorities remains key risks to the new order inflows. The order inflows from non-infrastructure segments like industrial and real estate (excluding affordable housing segment) is expected to remain muted, with weak private sector capex growth.

The working capital cycle for the larger construction players has remained at higher level, owing to slow realization of receivables, and slow-moving legacy projects. This has been met partly by higher creditors, thus percolating to sub-contractor’s working capital cycle as well. The working capital situation is not likely to see any major improvement in the near term.

With healthy accruals, the balance sheet of many construction companies has improved over last 2-3 years.

While the overall credit profile of construction companies has improved in last couple of years, many players in the sector still remain highly leveraged. Their ability to raise funds via stake sale in its subsidiaries, monetisation of assets, or dilution of equity will be key factors in improving liquidity and the capital structure, particularly for companies that have been aggressive in the BOT space in the past.

Asset monetisation can also help in lowering the borrowing levels for companies which have operational assets. With an improvement in the equity capital markets, equity-raising ability has also improved.

Due to these factors, ICRA expects the credit profile of construction companies to remain stable in the short to medium term.

Published on December 24, 2019
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