Marginal impact of Covid-19 on Q4 performance of construction firms: ICRA

Our Bureau Hyderabad | Updated on July 27, 2020 Published on July 27, 2020

Revenue, profitability to be impacted in FY21 with severe impact in Q1 FY21

The financial performance of 12 construction companies, analysed by ICRA, witnessed a marginal decline in revenues and operating profit (OPBITDA) of 9-10 per cent on an aggregate basis during Q4 FY20.

The Covid-induced national lockdowns also impacted the execution in late March this year.

However, the impact on the aggregate net profits was higher with a 33 per cent contraction in growth due to higher depreciation and financial charges (which includes bank guarantee charges and interest on mobilisation advances for some companies).

The balance sheet at the aggregate level improved with lower borrowings as on March 31, 2020, ascompared to the previous year, supported by multiple factors such as healthy accruals from operations, the availing of mobilisation advances, etc.

The aggregate order book of the sample construction companies has also reduced with lower new order inflows, though it remains adequate with an aggregate order book-to-operating income ratio (OB/OI) of 2.9 times as of March 31, 2020.

ICRA expects the performance of the construction companies to be impacted in FY21 with a major impact in Q1 FY21 due to further lockdowns due to the Covid-19 pandemic, labour migration, supply chain disruptions, increased expenses (fixed costs and cost increase due to adherence to Covid-19 guidelines), etc.

Impact of monsoon

Abhishek Gupta, Assistant Vice-President, Corporate Ratings, ICRA, said, “While the construction activities started since April 20, labour availability and supply chain logistics had been a major challenge, and this is likely to reflect in the Q1 FY21 performance. Though execution has been gradually picking up, challenges remain and with the monsoons’ impact in Q2 FY21. Execution is expected to ramp up meaningfully only from H2 FY21 provided the Covid-19 pandemic remains under control.”

As the pandemic situation is still evolving the extent of the impact remains uncertain, though the credit coverage ratios are likely to moderate in the near term. With lower execution, operating income and profits of construction companies are likely to see a significant decline in Q1 FY21. However, due to low operating and financial leverage, most construction companies are better placed to withstand this short-term disruption. Furthermore, the relief measures taken by the government will support liquidity and recovery of the construction companies.

Government relief measures

Gupta added, “The relief measures announced by the government, including the six months moratorium for repayment of loans and deferment of interest payments, the release of retention money and the bank guarantees on a pro-rata basis have been a relief. Timeline extension (three-six months), a grace period for payment of duties and taxes, a faster payment cycle, and the reduction in the interest rates is expected to support the liquidity position of the companies.”

Post pandemic, some state governments are likely to reduce investment in infrastructure in FY21 to tide over the additional cost burden arising from the situation. Further, contractors working for private sector clients also carry the risk of their clients cutting down or going slow on the capex, given the demand situation, particularly in the industrial segment (factory buildings/ warehousing etc).

Even after resolution of labour issues, the pick-up for these projects may not be immediate but contingent upon end-user demand prospects of their clients and the fund availability with clients. However, the Centre’s projects are likely to fare better with the increased borrowing plan of the government which can help support the infrastructure spending in the short term.

Further, over the medium term, the order book of companies in the infrastructure segment is expected to grow, supported by the strong national infrastructure pipeline, which envisages a significant scale-up of infrastructure investments till FY25.

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Published on July 27, 2020
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