Real Estate

Ind-Ra revises construction sector outlook to ‘improving’ for FY22

Our Bureau Hyderabad | Updated on March 10, 2021

India Ratings and Research (Ind-Ra) has revised the construction sector outlook to improving for FY22 from negative for FY21 and revised the rating Outlook on its rated construction companies to Stable for FY22 from Negative.

This is based on the likely recovery trajectory of engineering, procurement and construction (EPC) players, post registering two consecutive years of revenue decline.

For the purpose of this report, Ind-Ra has considered its rated peers excluding Larsen & Toubro Ltd (IND AAA/Stable) due to its large scale which would otherwise have skewed the report analysis.

The rating agency expects the revenue to decline by 4.0% YoY in FY21 due to pandemic impact. In its FY21 Mid-Year Outlook had estimated a 15.0% YoY decline in the sector scale of operations on account of the lockdowns and weak performance in 1HFY21. However, EPC companies addressed the supply-side issues such as manpower mobilisation and logistics for raw material procurement faster than anticipated, resulting in a faster-than-expected recovery in the order book execution.

The increased focus on infrastructure spending in the recently announced budget for FY22, where healthcare, water (including irrigation), roads and railways have seen strong allocations, would result in higher-order inflows to the sector.

This apart, new projects have been included in the National Infrastructure Pipeline (NIP) where most of the project execution is pending.

To complete the NIP in the stipulated time frame by FY25, the government has to increase the pace of tender announcements resulting in increased order inflows across the segments of NIP. Government focus on improving the construction pace in road projects, electrifying railway lines and commencement of dedicated freight corridor projects in FY22 would result in strong order inflows in these segments.

The liquidity profile of the overall EPC sector entities in FY22 to remain adequate based on the reduction in the net working capital cycle coupled with higher profitability. The Government measures, such as reducing the bank guarantee requirements while participating in orders, partial release of performance bank guarantees, establishing an independent developmental financing institution at the capital of Rs 200 billion for providing long-term debt financing for the infrastructure segment and the EPC sector funding, would offer the much-needed support to the sector.

As per the Reserve Bank of India, banks' exposure to construction, roads and other infrastructure segments was contracted by 3.4% YoY in FY20. However, it increased by 5.0% yoy in November 2020, as most EPC players availed incremental debt to gauge their liquidity profiles to mitigate pandemic impact.

Published on March 10, 2021

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