Infrastructure companies, including pureplay road construction companies, that were already reeling under pressure in the first nine months of FY20, have been battered further in the current lockdown.

While on the one hand, with complete halt in operations, companies will certainly see significant drop in revenues, both from toll collections and execution (billing) of construction contracts, on the other, fixed costs such as operations and maintenance (O&M), finance charges on leased machinery, and interest costs will continue to pile up.

A breather is however, available due to the force majeure clause for toll collection revenues. Though the clause is applicable for construction contracts as well, the reimbursement of losses is not quite significant, in this case. Thus, companies will witness a stretch in working capital cycle, apart from the pressure on profitability.

That apart, in contrast to the expected recovery in March quarter, given the impact of the pandemic, the outlook for the next couple of quarters seems to be hampered further.

Force majeure a relief

The Ministry of Road Transport and Highways (MoRTH) had, through a notification on March 25, advised NHAI to stop levying toll charges during the 21-day lockdown period. To make good the revenue loss for companies and the NHAI, MoRTH had clarified that the event will be classified as a force majeure of concession contracts.

Force majeure is a clause in an agreement or contract that categorises certain events or circumstances as unforeseeable, that prevents either party from fulfilling a contract. In the case of a toll project, invoking the force majeure clause in the contract implies an extension of the tenure of the contract to make good the loss of revenue for the company.

Besides, as Rajeshwar Burla, Vice President, Corporate Ratings, ICRA, says, “Under a force majeure (political) event, 100 per cent of O&M and interest costs are reimbursed for the affected period. This would cover around 50-55 per cent of the loss of revenue incurred by these projects.”

But toll revenues constitute only about 20 per cent of consolidated revenues for companies in the listed space. The rest comes from the execution of construction contracts. While force majeure applies to these contracts as well, the relief is only available in the form of an extension of contract tenure.

Burla says, “The only relief that these construction contractors get due to force majeure is that the current stoppage of work will not be treated as non-performance at their end. To this extent, they will get an extension in the timeline for completion of the project.” This can protect them from being penalised for non-compliance.

“But with regard to their liquidity and profitability, given the fixed obligations, the construction companies will surely be under stress, at least for a quarter or so,” he adds.

Other problems persist

The fixed costs for these companies will act as an overhang on profits in the near term, given the loss of revenue during this period. Also, companies are more likely to see stretched working capital cycles due to a slew of reasons. One, while the revenue for the 21-day period is a miss, companies might also witness delays in their receivables cycles. This is due to the government departments operating at limited capacities.

Two, apart from delays in receivables, even the billing process might get elongated, due to lack of independent engineers who certify the project execution.

Three, the companies will have to continue to incur O&M costs and interest costs. Thankfully, with the RBI directing banks to grant moratorium on interest payments on working capital facilities and on repayments of term loans, construction companies have some respite, more so since most companies have a huge chunk of repayment obligations in the month of March.

However, the moratorium will only give a relief in terms of the timing of the payment obligation, while the interest charges will continue to accrue during the moratorium period too.

Outlook remains bleak

In the first nine months of FY20, road construction companies saw a lull in both toll collections and fresh order awarding from NHAI. With the Centre’s focus returning to infrastructure through the National Infrastructure Pipeline (NIP), January and February 2020 saw a rebound in order awarding. The fading of economic slowdown had also contributed to a marginal increase in toll collections in February 2020.

This momentum has now been unfortunately broken by the onset of Covid-19. While March will be subdued following the nationwide lockdown, in terms of both toll revenues and order inflows, analysts expect the lull to continue in the coming quarters as well.

“Since we are just at the start of the pandemic, the effects could be felt all through the first half of FY21,” says Burla.

He says, “The Centre has other major issues to combat with, currently. Awarding infrastructure or road construction projects will surely be on the backburner for the Centre. This is because the fisc is already strained with multiple expenditure to be met immediately.”

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