ICRA: Covid-19 causes marginal impact on construction companies

ICRA
The financial performance of ICRA's sample of 12 construction companies witnessed a decline in revenues and operating profit (OPBITDA) of 9%-10% on an aggregate basis during Q4 FY2020. This was due to the impact of the Covid-19 pandemic and the consequent measures which impacted the execution in the later part of March 2020. The impact on the aggregate net profits was higher with a contraction in growth of 33% due to reasons like higher depreciation and financial charges (which includes bank guarantee charges and interest on mobilisation advances for some companies). The balance sheet at the aggregate level improved with lower borrowings as on March 31, 2020, compared to the previous year, supported by multiple factors including healthy accruals from operations and the availing of mobilisation advances. The aggregate order book of the sample construction companies has also reduced with lower new order inflows, though it remains adequate with an aggregate order book-to-operating income ratio (OB/OI) of 2.9 times as of March 31, 2020. ICRA expects the performance of the construction companies to be impacted in Q1 FY2021 due to the Covid-19 pandemic-related lockdowns, labour migration, supply chain disruptions and increased expenses.

Abhishek Gupta, Assistant Vice-President, Corporate Ratings, ICRA, informed that while the construction activities started since April 20, 2020, labour availability and supply chain logistics had been a major challenge, and this will reflect in the Q1 FY2021 performance. Though execution has been picking up, challenges remain and with the monsoons' impact in Q2 FY2021, execution is expected to ramp up only from H2 FY2021, provided the Covid-19 pandemic remains under control.

As the pandemic situation is still evolving the extent of the impact remains uncertain, though the credit coverage ratios are likely to moderate in the near term. With lower execution, operating income and profits of construction companies are likely to see a decline in Q1 FY2021. Due to low operating and financial leverage, most construction companies are better placed to withstand this short-term disruption. The relief measures taken by the Government will support liquidity and recovery of the construction companies. The relief measures announced by the Government, including the six months moratorium for repayment of loans and deferment of interest payments, the release of retention money and the bank guarantees on a pro-rata basis have been a relief. The extension of timelines, allowing a grace period for payment of Government duties and taxes, a faster payment cycle and the reduction in the interest rates is expected to support the liquidity position of the companies.

Some state governments are likely to reduce investment in infrastructure in FY2021 to tide over the additional cost burden arising from the situation. Contractors working for private sector clients also carry the risk of their clients cutting down or going slow on the CAPEX, given the demand situation, particularly in the industrial segment. For these projects even after resolution of labour issues, the pick-up may not be immediate but contingent upon end-user demand prospects of their clients and the fund availability with clients. The Central Government projects are likely to fare better with the increased borrowing plan of the Government which can help support the infrastructure spending in the short-term. Over the medium term, the order book of companies in the infrastructure segment is expected to grow, supported by the strong national infrastructure pipeline, which envisages a scale-up of infrastructure investments till FY2025.

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