ICRA has given a stable outlook for the construction sector, in its year end assessment of the sector.
The order inflow for construction sector has been robust over the last few years, supported largely by increased government spending towards infrastructure. As a result, the order-book position of most of the construction players is currently adequate to provide medium term revenue visibility.
|Exhibit 1: Order book movement for construction companies||Exhibit 2: Order book to Operating Income (OI) Ratio for some construction companies|
|Sources: ICRA research|
The construction companies are likely to witness significant opportunities from the railways, ports, urban infrastructure and airport segments. In the railways segment, besides the core railway capex (doubling, new lines, signalling, electrification, etc), the station redevelopment, and the recently announced bullet train project is expected to provide significant opportunities to the construction companies. Similarly, in the road sector, adequate pipeline of projects for development and upgradation of the national highways and state highways exists. The Bharatmala Pariyojana project itself is expected to provide large opportunities for the construction sector as the programme is the largest road development programme in India with a planned investment of Rs. 5.35 trillion.
With a huge pipeline of projects to be awarded in the infrastructure sector, ICRA expects the new order inflows for construction companies to remain healthy, albeit there can be a slowdown in the pace of order tendering in the months closer to the Lok Sabha general elections due to be held in April-May 2019. Besides this, delays in land acquisition also remains a risk to new order inflows, particularly in the transportation infrastructure sector. The order inflows from non-infrastructure segments like industrial and real estate (excluding affordable housing segment) is expected to remain muted, with weak private sector capex growth.
|Exhibit 3: Development programmes in key infrastructure sub-sectors|
|Sector||Key Programmes||Estimated Capex size|
|Roads||National Highways - Bharamala Pariyojana||~Rs. 7 lakh crore over 5 years|
|State Roads – Various state expressways||~Rs. 0.5-1 lakh crore per year|
Regular rail infrastructure
|~Rs. 1.5 lakh crore per year|
|Water and Irrigation||National River Linking Project
(NRLP), Accelerated Irrigation
Benefit Programme (AIBP)
|~Rs. 4-5 lakh crore|
|Urban Infra||Metro Rail/ MRTS, Water supply
and sanitation, AMRUT,
Smart Cities, Swachh Bharat,
|~Rs. 3-4 lakh crore over 5 years|
|Airports||Development of 100 airports in
next 15 years
|~Rs. 3-4 lakh crore over 15 years|
|Ports||Sagarmala||~Rs. 7 lakh crore over 5 years|
|Sources: ICRA research|
On the execution front, being an election year, ICRA expects strong focus on execution which along with healthy order-book should support growth in operating income of construction companies in the first half of CY2019, though it could witness moderation post elections till stabilisation of new Central Government. Furthermore, many road projects awarded in 2018 and awaiting appointed date are likely to start execution in CY2019, which will support execution. However, construction companies which have leveraged balance sheets and stalled or slow-moving projects, would continue to face challenges.
Operating profitability is expected to remain stable with the benefits of increased execution; though this would also be dependent on any steep variation in key raw-material and labour cost. However, with increased scale of operations, the capex and working capital requirement will consume most of the cash accruals. The working capital cycle for the larger construction players has remained at higher level, owing to slow realisation of receivables, and slow-moving legacy projects. This has been met partly by higher creditors, thus percolating to sub-contractor’s working capital cycle as well. The working capital situation is not likely to see any major improvement in the near term. Further, with increased scale of operations, the Bank Guarantee requirement is also expected to increase, which will require additional collateral and margin money. In the absence of adequate bank guarantee limits, companies will not be able to unlock retention money or avail mobilisation advances, thereby having an adverse impact on their liquidity.
With healthy accruals, the balance sheet of many construction companies has improved over last two to three years. With increased scale of operations, the debt of construction companies is expected to increase, albeit marginally, except in the case of increase in working capital intensity or investment in asset owning model like the Hybrid Annuity Model (HAM) based projects where the increase in borrowing will be higher. While the overall credit profile of construction companies has improved in last couple of years, many players in the sector still remain highly leveraged and their liquidity pressure is likely to persist in the short-term as the lenders remain cautious towards the infrastructure and construction sectors. Their ability to raise funds via a stake sale in its subsidiaries, monetisation of assets, or dilution of equity will be key factors in improving liquidity and the capital structure, particularly for companies that have been aggressive in the BOT space in the past.
Asset monetisation can also help in lowering the borrowing levels for companies which have operational assets. Many such transaction have taken place in the last few years particularly in the road sector, with active interest from private equity, funds, and other long-term investors in acquiring operational projects. Infrastructure Investment Trust (InvIT) can also help lowering the leverage for construction companies which had ventured into asset-owning business and have multiple operational projects. With an improvement in the equity capital markets, equity-raising ability has also improved. Some construction companies have successfully raised funds through the equity route like IPO/QIPs/rights issue/warrants/preference shares, which has helped in improving their balance sheet and liquidity position.
Due to these factors, ICRA expects the credit profile of construction companies to remain stable in the short to medium term.