Construction Firms May Be Better Placed To Weather This Slowdown

Construction companies, preparing to resume work after the government eased some lockdown restrictions, may be bracing for a hit on their finances in the ongoing fiscal. Yet, they may be in a better position to weather the challenges than in the past.The sector, already grappling with lower capex amid rising fiscal stress, could face first contraction in operating margins since 2013-14 because of the Covid-19, Edelweiss Securities said in a report. But that’s only part of the story.The last time the industry faced a slowdown was on the back of high debt levels, stretched working capital requirements and arbitration cases. This time, debt levels have fallen, putting them in a better position, according to Shubham Jain, senior vice-president and group head at ICRA Ltd.The financial viability situation of the construction companies is way better than the slowdown of 2013-14 on account of operating leverage since the debt levels of these companies have come down significantly, Jain said. Interest paying abilities have only improved over the last 6-7 years due to efforts of the industry and the government, Jain said.These included introduction of hybrid annuity model—where 40 percent of the project cost is borne by the government—and 2016 guidelines directing government agencies to pay 75 percent of arbitral award amounts to an escrow account against margin-free bank guarantee in cases where the award is challenged.Here’s a look at why the companies may be able to overcome their second slowdown in less than a decade.Stronger Balance SheetThe aggregate debt-to-equity ratio of 12 building contractors and road companies improved from 1.5 times in FY14 to 0.8 times in FY19, according to data provided by Ace Equity and ICRA estimates.ICRA expects the ratio to stay at 0.8 times in the ongoing fiscal. That’s because even as debt levels of companies rise, their net worth is also expected to increase..The debt-to-net worth ratio of building contractors like Ahluwalia Contractors (India) Ltd., NBCC (India) Ltd. and ITD Cementation India Ltd. has fallen. Road builders, barring Ashoka Buildcon Ltd. and contractor Simplex Infrastructures Ltd., too, saw the ratio decline significantly.“From 2014 onwards, building contractors have improved the quality of clients,” Rohit Natarajan, associate vice president of Antique Stock Broking, told BloombergQuint. “This has led to better operating profit and better debt reduction. Similarly, in road space, the pace of construction is higher year over year. Moreover, over the last few years, NHAI projects had better working capital turnover.”In the case of universal contractors—or companies with a diversified order book spanning road-building, marine, metro and irrigation projects—Natarajan said these companies were in deleveraging phase over the past decade. Many reduced the size of balance sheet—either by reducing assets, spinoffs or downsizing their non-core business, he said..Interest Coverage RatioThe interest coverage ratio—the measure of a company's ability to meet interest payments—has improved for construction companies over the years, implying decreased debt levels and higher profits.ICRA while keeping the coverage ratio stable for the FY20, revised estimate lower to 1.8 times for FY21, primarily due to marginal increase in interest expenses on higher borrowing in the first half of the fiscal, when the impact of Covid-19 would be felt..Covid-19 ThreatAlthough the industry is better placed compared to the previous slowdown, smaller players dependent on state government orders could face payment delays given the financial stress the governments could be facing in the face of Covid-19 situation, Rohan Suryavanshi, head-strategy and planning at Dilip Buildcon Ltd., told Bloomberg Quint. “With no revenue and delayed payment, such small companies would have challenging times ahead.”.Road To RevivalJain of ICRA suggested that the government should ensure adequate liquidity support from banks and other institutions to kick-start activities in the capital-intensive sector. “The high multiplier effect of the sector itself can trigger improved demand in many allied industries,” he said. “Further, faster settlement of claims/receivables pending with various authorities can help the situation considerably.”KPMG said that over 49 million people—or close to 12 percent of nation’s working population—are employed in the construction sector, and that its revival is vital to expedite recovery from the economic impact of Covid-19.For quicker recovery of the sector, it suggested:Prioritisation of projects.Revisiting project definition and delivery strategy.Building up a three-pronged approach, which includes strengthening contractual provisions and project governance.

Construction Firms May Be Better Placed To Weather This Slowdown

But a quick recovery from the coronavirus impact is crucial for the construction sector as they employ 49 million people in India.

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