India Ratings gives negative outlook to construction sector

India Ratings has maintained a negative outlook on the construction sector for the second half of 2013 due to execution and liquidity challenges faced by the key segment of the economy. The negative outlook is in view of the continued execution and liquidity challenges facing the sector. These challenges were identified as major constraints for the sector in the beginning of the year, the rating agency said today.

"The impact of these challenges is likely to intensify in the near term," it said in a statement here. Construction companies have concentrated more on the execution of existing orders than on bidding for new projects, the agency said.

"This is reflected in better top-line growth during second half of FY13 compared to the corresponding period in 2011-12, along with a decline in the order book position. "However, delays in obtaining statutory clearances and increasing working capital needs continue to put pressure on the financial profile of the companies in this sector."

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The prevailing situation has been compounded by the inability of firms to pass on input cost increases, which has resulted in a fall in EBITDA margins, a trend that is likely to continue in the near term, India Ratings said.

"Working capital cycles continue to be stretched on account of delays in the certification of works completed by companies. Higher debts for executing large order books and to fund working capital along with high interest rates have led to further deterioration of credit metrics of the companies."

Given the downward pressure on margins and higher requirements for funds, credit metrics may worsen further in the near term, the rating outfit said. It said faster order execution and liquidity easing are key to a stable outlook for the sector.

"Better availability of funds and Governmental policy actions addressing the factors hindering speedy execution of works would have a positive impact on the industry.

"Restricting order books to a manageable level, especially by fund-starved companies, can lead to liquidity easing and improvements in credit metrics," the agency said.

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