Mid-sized construction cos growing faster

Construction players are in for better times with significant opportunities ahead, supported by the Government’s push towards infrastructure development projects, according to ICRA.

The past three to four years have witnessed a quantum increase in infrastructure capital outlay, particularly in the roads, railways and urban infrastructure segments, and this is likely to continue over the medium term. This has boosted the order book of construction companies significantly. With the expected strong focus on infrastructure development by both the Centre and state governments, construction companies should continue to see a healthy influx of new orders.

According to Shubham Jain, Vice-President and Group - Head, Corporate Ratings, ICRA, “Several mid-size construction companies (with operating income between Rs 1 billion and Rs 5 billion) have grown at a faster rate than large construction companies supported by increased opportunities, relatively lower leveraged balance sheet and lesser legacy issues. With the improvement in operating performance of construction companies, including healthy growth in operating income and increase in operating profitability, the credit metrics of a majority of companies have witnessed a gradual improvement. This is also reflected in the higher credit ratio (ratio of number of rating upgrades to number of rating downgrades) for the sector, which has been close to 1.2x in the past three years.”

In comparison with the credit profile of large construction companies, many mid-sized companies exhibit better coverage ratios because of lower debts in their books. Nevertheless, scale, regional concentration and financial flexibility remain a challenge compared to large construction companies, which have better access to funds as well as credit terms. Apart from this, for mid-sized construction companies, availability of non-fund-based limits (primarily bank guarantees or BG) also remains a constraint. According to ICRA, mid-size construction companies are graduating from subcontractors to main contractors. Their focus on the core construction business and adoption of projects in geographies in proximity to their base are supporting execution.

“On the flip side, these companies remain exposed to challenges,” adds Jain. “With growth in operations, many companies plan to enter or have recently entered the asset-owning space, which, being capital-intensive, can impact their balance sheet and liquidity positions over the short to medium term.”