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COVID-19 effect: Real estate firms undertaking projects in metros and areas under lockdown expected to feel the heat

The performance of most mid and large-sized construction companies is not expected to be materially impacted as these are focussed on non-urban infrastructure projects that are located in remote areas

Labourers work at the site of metro railway flyover under construction in Ahmedabad, India, March 31, 2016. India's infrastructure output grew an annual 5.7 percent in February, its fastest pace in at least 13 months, mainly driven by a surge in production of cement and fertilizers, government data showed on Thursday. REUTERS/Amit Dave - RTSCZAY

Labourers work at the site of metro railway flyover under construction in Ahmedabad, India, March 31, 2016. India's infrastructure output grew an annual 5.7 percent in February, its fastest pace in at least 13 months, mainly driven by a surge in production of cement and fertilizers, government data showed on Thursday. REUTERS/Amit Dave - RTSCZAY

Real estate projects which are located within the urban areas such as metro-rail projects, building construction are likely to feel a greater impact of the COVID-19 second wave due to localised restrictions and reverse migration of labour, an analysis by ICRA has said.

Companies which are focussed on construction of real estate projects would witness a higher impact, given that most of these projects will be in metro/large cities where the risk of labour migration and localised lockdown could constraint their execution, it said.

The recent sharp spike in the COVID-19 cases does increase the risk of restrictions on construction activities at the localised level and curtail labour availability at project sites, which could cause short-term disruptions in construction activities, it said.

Recently, Delhi and Maharashtra and Karnataka have announced lockdowns of 1-2 weeks, while many other states have announced weekend lockdown/restrictions, which would impact the movement of labour and raw material. If the situation deteriorates, other states could also impose lockdowns in the near term.

However, unlike earlier lockdowns, relaxations have been given to certain activities and construction is permitted at sites where labour is available, though transportation of labour is not permitted.

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However, the performance of most mid and large-sized construction companies is not expected to be materially impacted due to this. Most of these companies are focussed on non-urban infrastructure projects (roads, railways, irrigation, etc) which are primarily located in remote areas, or at a distance from the metro/large cities, it said.

This is because unlike the first wave, there is no nationwide lockdown and only localised lockdown/restrictions with exemption for construction activities.

Prior to the second wave of COVID-19, the construction sector had started witnessing strong recovery and pace of execution had crossed the pre-COVID levels as reflected in the construction GVA growth of 6.2% in Q3 FY2021, and estimated growth of 8.4% in Q4 FY2021. Due to this recovery, the construction GVA for the full financial year 2020-21 (FY2021) is expected to contract by only 10.3%, despite a sharp 29.1% contraction in H1-FY2021, it said.

The recovery was driven by healthy pace of execution, supported by favourable policies from the government in terms of lowering the bank guarantee requirement, faster clearance of bills, and speedier clearances/approvals, it said.

“While the second wave is more widespread than the first one, the Government is not considering nation-wide lockdown yet, given the severe economic fallout of disrupting major economic activities. With this, the reverse migration of labour has also been significantly lower thus far, compared to that witnessed during the first wave. While the situation is changing rapidly, as things stand today the disruption in construction activities is not expected to be severe,” said Abhishek Gupta, Assistant Vice President and Sector Head, ICRA.

ICRA expects such a disruption to be limited and short-tenured, and hence has not revised its revenue growth estimates of 15-20% for FY2022. Further, given that the sector had faced a more intense effect during the first wave, most companies have improved their preparedness in terms of labour and raw-material availability.

“Interactions with our rated issuers in the construction sector indicates limited or no impact thus far on project execution. Further, most companies rated by ICRA in the investment grade have adequate liquidity and have demonstrated the ability to ramp-up execution pace, which makes their credit profile resilient to the short-term disruptions.

ICRA has a Stable outlook on the construction sector over the medium term, supported by an adequate order book (order book-to-operating income ratio stands at over three times for most construction companies), strong pipeline of projects under the National Infrastructure Pipeline, as well as the measures taken by the Government to support project execution. We will continue to monitor the situation, especially the receivables and billing cycle, which impacts the liquidity profile of the contractors,” Gupta said.
Moneycontrol News
first published: Apr 26, 2021 05:31 pm

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