Execution concerns persist for construction sector: ICRA
ICRA has come out with its report on Indian construction sector. According to the research firm, opportunities for construction companies are expected from projects to be undertaken in the opportunities in railways, urban infrastructure - particularly metros, airports and roads sectors.
October 23, 2012 / 12:58 IST
ICRA has come out with its report on Indian construction sector. According to the research firm, opportunities for construction companies are expected from projects to be undertaken in the opportunities in railways, urban infrastructure - particularly metros, airports and roads sectors.
The construction industry continues to face multiple challenges - capex deferrals by the private sector due to dwindling business confidence and stalemate in policy and decision-making has resulted in muted new order inflows; execution of existing order-book has slowed down due to delays in land acquisition, obtaining clearances and policy-level uncertainties that continue to plague key infrastructure sectors such as power, airports and ports; rising input and labour costs coupled with sluggish pace of execution has resulted in lower fixed cost absorption and pressurized operating profit margins. Further, delays in realizing receivables and in work certification coupled with the need to extend greater support to sub-contractors has elongated the working capital cycle and weakened cash-flows from core construction business. This, coupled with the need to support the asset-ownership business has resulted in an increase in debt levels and dented net profit margins through increased interest costs.Execution concerns have intensified evidenced by the elevated quantum of stalled projects and declining y-o-y growth rate of projects under implementation; this has moderated the y-o-y revenue growth rates of construction companies. There is also a risk of protracted delays in government decision-making following the recent exposés by the CAG. In this environment management commentary remains mostly cautious with regards to order inflows, revenue growth and future profitability.Recognizing the need to kick-start investments in infrastructure the government has setup FY 13 targets for various subsectors such as roads, ports, power, railways and civil aviation – while this could increase pace of tendering, progress on actual execution would require the government to address the various issues that are currently hampering execution such as delays in land acquisition and in obtaining clearances and approvals. While the government has taken certain positive measures including relaxation in the land transfer policy for central-government owned lands and setting up a project clearance board for improving the pace of project clearances, the steps taken thus far have not resulted in any significant improvement in pace of execution.Going forward, opportunities for construction companies are expected from projects to be undertaken in the opportunities in railways, urban infrastructure - particularly metros, airports and roads sectors. The PMO has specifically accorded high priority to big-ticket projects such as the Dedicated Freight Corridor (DFC) project and has also indicated that adequate measures and follow-up would be undertaken to ensure speedy award and implementation of Public Private Partnership (PPP) projects in the port sector. In the current environment, execution challenges are expected to persist and the revenue growth rates of construction companies will continue to remain muted. Most construction companies have ventured into the asset-ownership space by undertaking PPP project under Build-Operate-Transfer (BOT) mechanism through Special Purpose Vehicles (SPVs). Need to fund equity in such projects coupled with execution delays during the construction-phase is expected to increase the level of support required from the parent construction company towards such SPVs.Further, project developers are also facing delays in achieving financial closure for PPP projects due to increased due-diligence by lenders which is a result of weaker-than-projected performance of many operational PPP projects and aggressive bidding done by the developers in the recent project awards. While many companies are actively seeking to raise cash through stake sale/dilution of projects only a handful of such deals have fructified; consequently many construction companies have supported their developer businesses by raising debt on their own balance sheets which has increased interest expenses and deteriorated their own financial profile.Since December 2011, ICRA has downgraded ratings of 29 construction companies1. The key reasons for the downgrades included execution delays due to non-availability of project sites, labour, inputs such as sand and pending clearances; marked increase in interest costs which, coupled with moderating revenues resulted in significant decline in net profitability and consequent deterioration in debt coverage metrics; increasing equity commitments in developer business coupled with inability to monetize assets in a timely manner; and stretched liquidity position due to increasing work-in progress and delays in realization of debtors resulting in significantly increased working capital requirements.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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