A STABLE OUTLOOK on the CONSTRUCTION SECTOR.

Improved prospects for construction sector in FY2022, driven by strong pipeline of infrastructure projects and supportive government measures.

The construction sector is set for better times in FY2022, driven by a robust pipeline of infrastructure projects and supportive government measures. Given the fact that the sector derives a major part of its orders from infra projects, the government plans of increasing the pace of infrastructure investment augers well for construction companies. Their prospects are expected to remain strong over the medium term. The infrastructure push under the National Infrastructure Pipeline (NIP) is planned at over Rs 111 lakh crore, over the FY2020-FY2025 period. A major part of NIP projects are in the transportation (roads, railway, etc), energy/power, and urban infrastructure segments. These segments are likely to see healthy traction in terms of new projects awards and execution in medium term.

Most construction players are currently placed comfortably in terms of the order-book position which provides medium term revenue visibility. With a huge pipeline of projects to be awarded in the infrastructure sector (as per the NIP), ICRA expects the new order inflows for construction companies to remain healthy in FY2022. However, this is only in so far as the infra projects are concerned because 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.  Further, delays in land acquisition, funding issues, and state government priorities remains key risks to the new infra projects.

As far as execution front is concerned, even here the sector is on a recovery path post Covid-19 pandemic induced disruptions. The execution was severely impacted in H1FY2021 due to the nation-wide lockdown, reverse migration of labour, and supply chain constraints. In the past few months, the government has announced multiple relief measures to support construction contractors including relaxation on EMD and performance security, relaxation of bidding eligibility criterion; and increased frequency of payments for government tenders. While the pandemic related uncertainties continue to remain, the execution has recovered sharply in last few months. ICRA expects the pace of execution to improve over the medium term supported by adequate orders in hand as well as the recent measures taken by the Government. Further, companies which have healthy balance sheet and orders in hand are expected to witness better performance in FY2022.

In line with increased scale of operations in the coming fiscal, the debt of construction companies is expected to increase, albeit marginally. The exception would be companies that are more working capital intensive or where investment is committed towards asset owning model like the Build Operate Transfer (BOT) and Hybrid Annuity Model (HAM) based projects, where the increase in borrowing could be higher. Low interest rates and reduced BG requirement too will help in keeping the overall finance expenses under control. With this, credit metrics of construction companies are expected to improve in FY2022. However, some players in the sector remain highly leveraged and their liquidity pressure is likely to persist as the lenders remain cautious towards the infrastructure/construction sectors. Their ability to raise funds via stake sale in its subsidiaries, monetisation of assets or dilution of equity will be key factors in improving liquidity and the capital structure.

As for entities with high exposure to PPP projects, regular monetization is crucial for churning of capital. While earlier, bilateral sale of assets was the primary mode of asset monetization, over the last few years Infrastructure Investment Trust (InvIT) has emerged as an attractive vehicle for asset monetization for its many advantages. InvITscan pool capital from long term investors and acquire assets which can release developer's capital. Increased capital availability with developers can help improve private players' interest in PPP projects thereby speeding up infrastructure investment cycle and opportunities for construction players.

Due to these factors, ICRA's FY2022 outlook on the construction sector is stable. The ratings agency expects the credit profile of construction companies to recover in FY2022 after weakening in FY2021. However, companies which are highly leveraged or have high exposure to state government projects could witness weakening in their credit profile. As government bodies are key clients for most construction companies, supportive measures as undertaken in the past can help in strengthening the sector and would play an important role. Besides increasing allocation towards the infrastructure sector, faster dispute resolution, and simplified approval process are other measures which could go a long-way in supporting the sector.

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