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Shrugging off the Covid pandemic-induced slowdown, the country’s construction sector is poised for good times in FY2022 due to strong pipeline of projects and various government measures aiding growth.
Rating agency ICRA has projected a ‘stable’ outlook for the construction sector stating that the credit profile of players is set to recover in the next fiscal after weakening in FY2021.
The investments planned under the National Infrastructure Pipeline (NIP) will be key growth drivers for the construction sector. The execution was severely impacted in H1FY2021 due to the nationwide lockdown, reverse migration of labour and supply-chain constraints.
Relief measures
However, in the last few months, the Centre has announced a slew of relief measures to support players, including relaxation on EMD (earnest money deposit) and performance security, relaxation of bidding eligibility criterion and increased frequency of payments for government tenders.
The order book position of most of the construction players is currently adequate, which provides medium-term revenue visibility. With a huge pipeline of projects to be awarded in the infrastructure sector as per the NIP, ICRA expects the new order inflows for construction companies to remain healthy in FY2022.
Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA, in a statement said: “The infrastructure sector is the key contributor to the construction sector’s order book. With a sharp increase in infrastructure investment planned under the NIP, the construction sector is likely to see significant opportunities in the medium term. A major part of the NIP is towards transportation (roads, railway, etc), energy/power and urban infrastructure. The players which are focussed on these segments and have a healthy balance sheet are well-placed to capitalise on these opportunities.”
On the execution front, ICRA expects the healthy order book to support growth in the operating income of construction companies in FY2022. However, companies which have leveraged balance sheets, and stalled or slow-moving projects will continue to face challenges.
With increased scale of operations in the next fiscal, the debt of construction companies is expected to increase, albeit marginally, except in the case of increase in working capital intensity or investment in asset-owning models.
Asset monetisation
Abhishek Gupta, Assistant Vice-President, ICRA, said: “For entities with high exposure to PPP (public-private partnership) projects, regular monetisation is crucial for churning of capital. While earlier, bilateral sale of assets was the primary mode of asset monetisation, over the last few years Infrastructure Investment Trusts (InvIT) have emerged an attractive vehicle for asset monetisation which can pool capital from long-term investors. Increased capital availability with developers can help improve private players’ interest in PPP projects, thereby speeding up the infrastructure investment cycle and opportunities for construction players.”
Due to these factors, ICRA’s FY2022 outlook on the construction sector is stable.
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