India Ratings
& Research (Ind-Ra) maintains a negative outlook on the construction sector
for 2014-15 (FY15), due to strained liquidity resulting from lengthened working
capital cycles & restrained lending by banks. While revenue has remained
flat, EBITDA margins have fallen and debt levels continue to rise, leading to
deterioration in credit metrics.
While most Ind-Ra rated companies have Stable
Outlooks reflecting that risks have inherently been captured at the lower
rating levels, we believe their credit metrics and liquidity will be under
pressure in FY15 and negative rating actions could be warranted, especially for
companies on negative watch/outlook.
The working capital needs of most construction firms
have increased but funding sources are drying up. Aggressive bidding at low
margins has reduced potential surpluses from operations.
As EBITDA margins are very close or even lower than
retention money margins in some cases, operational cash flows are negative and
the companies need further working capital. Compounding this is the steep rise
in order book till 2012 which now requires additional funds to execute.
Also, delays in statutory clearances impede timely
completion of projects. All these factors are likely to continue to put
pressure on construction companies in 2014.
Construction and Infrastructure..
Ind-Ra expects banks to continue to be cautious while
lending as the construction and infrastructure (excluding power) sectors
together account for over 20 % of the aggregate debt under the corporate debt
restructuring mechanism (source: CDR Cell).
Enhancement of working capital limits is taking a
long time, thus adding to the liquidity pressure on companies and also
weakening their ability to execute. Liquidity of construction companies has further
been impacted by the Reserve Bank of India’s circular of May 2013, restricting
the sanction and roll-over of short-term loans. This has reduced the
flexibility of companies to fund their ad-hoc and short-term working capital
requirements.
Order execution will continue to be sluggish in FY15
due to reduced ability of companies to fund working capital and delays in
statutory clearances. Consequently, the aggregate revenue growth of the sector
will continue to decline, with some companies facing a fall in revenue.
Debt & interest costs continue to be high, due to
increasing working capital requirements and funding of BOT project equity
through borrowing at the parent level. This, coupled with the sluggish revenue
and lower EBITDA margins, has weakened credit metrics which are unlikely to
recover in the near term.
Build-operate-transfer..
Ind-Ra expects limited takers for fresh BOT projects,
given the already stretched financial position of companies and their inability
to raise funds. Many construction companies have stretched their resources by
taking on build-operate-transfer (BOT) projects without identifying the source
of equity funding.
Companies aiming to carry out construction in-house
have taken on BOT projects from which the returns are too low to attract
private equity investments. Since public and private equity markets have been
lacklustre, many of these projects have been stalled.
WHAT CAN CHANGE THE OUTLOOK..
Improved Fund Availability..
The outlook could be revised to stable if better
availability of both debt & equity funding results in the improved execution
of order book and better liquidity and credit metrics.
Asset Monetisation..
The ratings
could benefit from the ability of companies to liquidate completed BOT projects
and other tangible assets leading to sufficient liquidity and the consequent
improvement in order execution and credit metrics.
For More details
Saraanya Shetty
Manager – Corporate Communications and Investor
Relations
India Ratings & Research A Fitch Group Company
Call: +91 22 4000 1729 Fax: +91 22 4000 1701
http://indiaratings.co.in/
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