Predicting a gradual recovery in credit profile of the construction sector, India Ratings and Research (Ind-Ra) has maintained a stable outlook on the sector during FY19. This is expected to be underpinned by accelerated revenue growth due to increased spending by the Government of India.
Benefits of EBITDA expansion will be partially offset by expansion in working capital cycle due to higher scale of operations, according to Niraj Rathi of the agency.
The agency expects revenue and EBITDA margins to continue to grow and cash flows to remain positive in FY19, barring the blip in FY18 due to the transitional impact of the implementation of the Goods and Services Tax regime.
Capital expenditure of construction companies is likely to increase as asset utilisation peaks and technical specification for contracts change. The agency expects a further improvement in the rating headroom in FY19 as companies in Ind-Ra’s portfolio continue to record higher EBITDA and generate free cash flow.
Credit profile of some of the issuers is at the higher end of the rating level, reflecting sufficient headroom to maintain the rating through the cycle.
The order inflows will continue to improve in FY19, driven by higher orders from transportation segment, led by an increase in engineering, procurement and construction contracts for roads as well as urban infrastructure projects. However, order inflow from the industrial segment is unlikely to revive, the agency observed.
Construction companies would continue to exercise bidding discipline to protect margins and due to reduced competition levels for large projects.