Construction Sector

Corporates
Construction
2014 Outlook: Construction Sector
Liquidity Improvement Key to Sector Revival
Outlook Report
Rating Outlook
N EGATIVE
(2013 MID- YE A R :
N E GA TIV E )
(2013: N E GA TIV E )
Negative Sector Outlook: India Ratings & Research (Ind-Ra) maintains a negative outlook on
the construction sector for FY15, due to strained liquidity resulting from lengthened working
capital cycles and 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.
Negative Rating Actions Likely: 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.
Dearth of Working Capital: In recent times, the working capital needs of most construction
companies 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.
Fall in EBITDA Margins: EBITDA margins have deteriorated during 2013, due to aggressive
bidding over the last few years which has been compounded by an increase in input cost and a
fall in revenue growth resulting in under-absorption of fixed costs.
(2013: N E GA TIV E )
Slowdown in Order Execution: 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. However, the Supreme Court’s verdict on de-linking
environmental clearance from forest clearance and the initiatives taken by the Project
Monitoring Group to fast-track clearances for large projects could improve execution of some
projects, especially where the construction company involved is financially strong.
Analysts
Bank Funding Drying Up: 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.
Sector Outlook
N EGATIVE
(2013 MID- YE A R :
N E GA TIV E )
Vinay Betala
+91 44 4340 1719
[email protected]
T Karthikeyan
+91 40 4017 8620
[email protected]
Sreenivasa Prasanna
+91 44 4340 1711
[email protected]
Ashoo Mishra
+91 22 4000 1772
[email protected]
Aashish Bhusnurmath
+91 11 4356 7252
[email protected]
Unfavourable Regulatory Actions: Liquidity of construction companies has further been
impacted by the Reserve Bank of India’s (RBI) circular of May 2013, restricting the sanction
and roll-over of short-term loans. This has reduced the flexibility of companies to fund their adhoc and short-term working capital requirements. In the circular, the RBI has stated that any
roll-over of short-term loans will be considered as restructuring unless the loan is based on a
proper pre-sanction assessment of the actual requirement of the borrower. Even such loans
are allowed to be rolled over for a maximum of only two times.
BOT Issues: Many construction companies have stretched their resources by taking on buildoperate-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 (PE) investments. Since public and private equity markets
have been lacklustre, many of these projects have been stalled.
www.indiaratings.co.in
21 January 2014
Corporates
Ind-Ra expects limited takers for fresh BOT projects, given the already stretched financial
position of companies and their inability to raise funds.
Stagnating Order Book: Order book stagnated in 2013 as expected, since orders from the
power sector dried up and those from the roads and other infrastructure and industrial sectors
slowed down. While Ind-Ra expects the order books to continue to stagnate in 1HFY15, they
could improve in the second half, if the policy framework for statutory clearances changes and
construction companies are able to sort out their funding problems.
Deteriorating Credit Metrics: Debt and 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.
What Could Change the Outlook
Improved Fund Availability: The outlook could be revised to stable if better availability of both
debt and 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.
Key Issues
Order Inflows
Order book stagnation in 2013 was on subdued industrial investments, power sector troubles,
reduced attractiveness of BOT projects in the road sector and lower appetite of construction
companies to take on new orders due to shortage of funds. Ind-Ra expects this to continue at
least for the first half of FY15.
Fresh investments could start flowing in to the infrastructure sector by the government’s action
to sort out fuel availability in the power sector and environment clearance, land acquisition and
forest clearance issues, which are stalling many projects. Industrial investments would follow a
turnaround in the economy. The ability to take on new projects would require strong balance
sheets, which depend on the infusion of equity, or generation of cash flows through order
execution. While Ind-Ra expects the government action to be implemented by 2QFY15, the
improvement in order book position may not be widespread but restricted to only the financially
strong construction companies.
Figure 1
Order Book
FY10
(INRbn)
FY11
FY12
FY13
4,000
2,948
2,683
3,005
3,000
2,296
2,000
1,000
0
Order Book
Source: Company financials, Ind-Ra
(Note: The above chart includes data from IVRCL Limited, IRB Infrastructure Developers Limited, Shriram EPC Limited,
Hindustan Dorr-Oliver Limited, J Kumar Infraprojects Limited, Sunil Hitech Engineers Limited, Larsen & Toubro Limited,
NCC Limited, Gammon India Limited, Punj Lloyd Limited, HCC Limited, Patel Engineering Limited and Simplex
Infrastructure Limited. All charts in the report are based on data from these companies unless otherwise mentioned.)
2014 Outlook: Construction Sector
January 2014
2
Corporates
Power: Order inflow from the power sector has seen a downward trend given the uncertainty
regarding fuel (mainly coal and gas) availability and supply, environmental clearances and
counterparty risks. Execution of the existing orders is likely to improve and fresh orders are
likely to come in only once these issues are resolved.
On the brighter side, the Project Monitoring Group set up by the Prime Minister has been fast
tracking resolution of issues such environmental clearances. Also, the financial restructuring of
state distribution companies has helped improve the counterparty profile.
Roads: The stretched financial position of construction companies led to a slowdown in
awarding of projects under the BOT model in FY13. The National Highways Authority of India
(NHAI) was able to award only 1,115km against the target of 7,464km. This forced the NHAI to
shift its focus towards awarding projects on a cash contracts basis, which was seen as a
positive move for fund-starved road developers. However, the progress on this front has been
slow too with only 424km being awarded during 1HFY14.
While the government had announced ambitious targets for the infrastructure sector in the
Twelfth Five Year Plan, the award process has been slow till now. A fresh policy push by the
new central government will be key to improve order inflows from this sector.
Industrial: Order inflows from the industrial segment have been slow and any revival of inflows
will depend on the recovery of the economic growth and business sentiment.
Order Execution
Order execution has slowed down during 2013, with aggregate revenue growth falling to single
digit levels. Ind-Ra expects this to continue in 2014.
Delays in obtaining statutory clearances continue to hamper order execution in all the
infrastructure sectors. However, the Supreme Court’s verdict on de-linking environmental
clearance from forest clearance will help start execution in non-forest land and provide
temporary momentum in the roads sector.
Order execution is also affected by the tight liquidity faced by most companies in this sector.
Aggressive bidding leading to low EBITDA margins has squeezed liquidity, especially where a
significant portion of the order value, close to the EBITDA margin, is locked up as retention
money.
BOT Funding Issues
Many construction companies have stretched their resources by taking on BOT projects without
identifying the source of equity funding. Also, access to both public and private sources of
equity continued to be limited in 2013, leading to either funding of project equity through debt at
the parent level, thus negatively impacting credit profiles, or delays in their execution.
Given their inability to access equity, various companies announced their intention to divest
completed projects to raise funds. However, the number of actual transactions has been very
low till date. This is both due to the underperformance of the completed projects and their
subdued future prospects due to a decline in economic growth.
Some of the projects have been rendered unviable for purchase by private equity/strategic
investors even at par value. This is due to the earlier bidding strategy of companies to include
construction profits in their return calculations and aggressive forecasting assumptions.
Ind-Ra expects there will be limited takers for fresh BOT projects, given the already stretched
financial position of companies and their inability to raise funds. This is already reflected in the
low award of road BOT projects by the NHAI during the past year.
2014 Outlook: Construction Sector
January 2014
3
Corporates
Working Capital
While the inventory/work-in-progress days have been stable around 70-75, receivable days
have been continuously deteriorating since FY10. This has stretched the liquidity position of
companies and led to an increase in working capital debt.
Liquidity has further been impacted as the amount of receivables due for over six months has
increased and such receivables are not funded by banks under working capital facilities. While
the companies could earlier fund such requirements through short-term loans from banks, this
avenue has also been closed by the RBI. In a circular issued in May 2013, the RBI restricts rollover of short-term loans to those based on a proper pre-sanction assessment of the actual
requirement of the borrower. The stipulation that any other rollover will be treated as
restructured debt has resulted in this source of funds drying up.
Figure 2
Working Capital
FY10
(Days)
FY11
150
120
105
105
116
123
FY12
FY13
H1FY14
129
90
71
75
73
64
71
60
30
0
Receivable days
Inventory/WIP days
Source: Company financials, Ind-Ra
Deteriorating Credit Metrics
Leverage continued to worsen in 2013 due to the increase in working capital debt and the debt
funding of BOT project. Ind-Ra expects the leverage position to deteriorate further, due to the
stagnation in revenue and the fall in EBITDA margins. This will lead to lower operating EBITDA,
even while debt levels are unlikely to come down.
The continued high debt levels and interest rates have led to a fall in interest cover which is not
likely to improve in FY15, given the likely increase in debt and continued high interest rates.
Figure 3
Credit Metrics
FY10
(x)
FY11
FY12
FY13
H1FY14
6
4.81
5
3.41
4
3
2.83
3.84
3.15
3.92
3.41
2.69
2.15
2
1.70
1
0
Leverage (Total Debt/Operating EBITDA)
Interest cover (Operating EBITDA/Financial expenses)
Source: Company financials, Ind-Ra
EBITDA Margins
EBITDA margins deteriorated during 2013, due to increased costs of major inputs such as
labour, cement and sand. Some inputs such as sand saw a sharp rise in prices in certain
regions, as mining bans impacted availability. Since such sudden price changes are not
adequately captured by indices, even companies with escalation clauses in their contracts
would be affected.
2014 Outlook: Construction Sector
January 2014
4
Corporates
Margins were further impacted as administrative costs continued to increase, even while
revenue either stagnated or fell.
Figure 4
EBITDA Margin
FY10
(%)
14
12
11.47
FY11
11.86
FY12
11.94
FY13
H1FY14
10.79
10.20
10
8
6
4
2
0
EBITDA margin
Source: Company financials, Ind-Ra
2013 Review
Of the 33 rating reviews undertaken during the year, 15 resulted in an affirmation. While six
companies were upgraded, these upgrades were from lower rating levels; there were no
upgrades in the investment grade category.
Of the eight companies which were downgraded, three were downgraded to ‘IND D’. These
include IVRCL Limited, Hindustan Dorr-Oliver Limited and GET Power Limited. Most of the
downgrades were due to worsening working capital cycles or inability to raise equity for BOT
projects, leading to deteriorating liquidity. Four companies saw a downward revision of outlook,
which again was due to liquidity tightening.
2014 Outlook: Construction Sector
January 2014
5
Corporates
Appendix 1
Figure 5
Rated Issuers
Issuer
TATA Projects Limited
IOT Infrastructure & Energy Services Ltd
IOT Utkal Energy Services Limited
IRB Infrastructure Developers Limited
J Kumar Infraprojects Ltd
IOT Anwesha Engineering & Construction Ltd
IOT Engineering Projects Limited
EMC Ltd
PES Engineers Pvt Ltd
B.G. Shirke Construction Technology Pvt Ltd
GVR Infra Projects Limited
ECI Engineering & Construction Company Limited
Aster Private Limited
Mahalakshmi Infraprojects Ltd.
Triveni Engicons Private Limited
Tribeni Constructions Limited
Ram Kripal Singh Construction Pvt Ltd
Abhiram Infra Projects Pvt Ltd
Sri Avantika Contractors ltd
Savvy Projects Private Limited
Artson Engineering Ltd
VPR Mining Infrastructure Private Limited
Supreme Infrastructure India Ltd
M V Omni Projects (India) Ltd
Uttam Sucrotech International Private Limited
Kamladityya Constructions Pvt Ltd
Siva Swathi Construction Private Limited
Sri Gopikrishna Infrastructure Private Limited
Vallabhaneni Constructions Pvt Ltd
R.S.V. Constructions Private Limited
K.Bhupal Engineers & Contractors Pvt Ltd
Ksheeraabd Constructions Private Limited
Grotech Landscape developers Private Limited
Raj Infrastructural Technologies India Pvt. Ltd.
Raj Infrastructure Development India Pvt. Ltd.
Raj Infrastructure Pvt Ltd.
Raj Promoters & Civil Engineers Pvt. Ltd.
SVS Mookambika Constructions Pvt Ltd
Delta Construction Systems Limited
Lekcon Infrastructure Pvt Ltd
Indus Projects Private Limited
Coramandel Infrastructure Pvt Ltd
Srinivasan Associates Pvt Ltd
Srinivasa Construction Corporation Pvt Ltd
SMS Infrastructure Limited
M/s. National Construction
M/s. Perfect Construction
M S Panesar & Sons
M B Panesar & Sons Pvt Ltd
Singh Construction Company
PV Infra Project Pvt Ltd
Green Infratech
Hycons Infrastructure (India) ltd
Railone Projects Private Limited
SEW Infrastructure Ltd
GMS Elegant Builders (I) Pvt ltd
SEW Transportation Network Limited
Rajshekhar Constructions Private Limited
Macons Infratech Private Limited
Nav Bharat Buildcon Pvt Ltd
Vinirrmaa Projects Pvt Ltd
GS Atwal & Co (Engineers) Pvt Ltd
RCM Infrastructure Ltd
Nandini Impex Private Limited
G.E.T Power Limited
IVRCL Limited
Gowthami Infratech Pvt Ltd
PMR Infrastructure Pvt Ltd
Hindustan Dorr-Oliver Limited
Long-Term
Issuer Rating
IND AAIND AAIND A
IND AIND AIND AIND AIND AIND AIND AIND BBB+
IND BBB+
IND BBB
IND BBB
IND BBBIND BBBIND BBBIND BBBIND BBBIND BBBIND BBBIND BBBIND BBBIND BBBIND BBB IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB+
IND BB
IND BB
IND BB
IND BB
IND BB
IND BB
IND BB
IND BB
IND BBIND BBIND BBIND BBIND BBIND BBIND BBIND BBIND BBIND BBIND BBIND BB-(SO)
IND B+
IND B+
IND B+
IND B
IND BIND B+
IND D
IND D
IND D
IND D
IND D
IND D
Outlook/
Watch
Stable
Stable
Stable
Stable
Positive
Stable
Negative
Stable
Stable
Negative
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Negative
Stable
Stable
Negative
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Negative
RWN
Stable
RWN
Stable
Stable
Stable
Stable
Stable
Stable
-
Ratings on shortterm instruments
IND A1+
IND A1+
IND A1
IND A1
IND A1
IND A1
IND A1
IND A2+
IND A2+
IND A2+
IND A2
IND A2
IND A2
IND A2
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A3
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4+
IND A4
IND A4
IND A4
IND A4
IND A4
IND A4
IND D
IND D
IND D
IND D
IND D
IND D
Source: Ind-Ra
2014 Outlook: Construction Sector
January 2014
6
Corporates
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2014 Outlook: Construction Sector
January 2014
7

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