The cash flow for construction companies expected to improve in FY 2016-17 as most of the orders procured during the last two years are likely to be executed this financial year, says Credit Outlook report of India-Ratings (Ind-Ra).
The report says, construction companies continued to witness negative cash flows from operations (CFO) in FY16, which is likely to improve gradually to near zero levels in FY17. The competitive intensity had reduced for new orders over the last two years and hence margins on such orders are expected to be higher.
Rating agency has maintained a stable outlook on the construction sector for FY17 as the sector is likely to see a further improvement in order execution and EBITDA margins. It expects an improvement in order inflows backed by increased public investments. All these factors will benefit those companies which have sufficient liquidity to execute projects, while those with weak liquidity will see limited traction.
Difficult borrowing conditions due to weak balance sheets are also affecting liquidity. Companies with strong liquidity however will continue to have a significant advantage over their peers, the rating agency says.
Execution will continue to improve in FY17 for companies with strong liquidity, due to the government’s focus on removing bottlenecks to execution in the infrastructure sector. This will result in better EBITDA margins due to better absorption of overheads.
“Credit metrics of construction companies are likely to improve in FY17, as these companies will benefit from higher revenue and profitability. Individual companies may also benefit from asset sales. Improving liquidity is likely to be the most important challenge for construction companies through FY17,” says the report.
The government has also laid out ambitious targets for spending on other infrastructure sectors and irrigation, drinking water supply, housing and power supply, which would entail significant opportunities for the sector.
Order inflow in the construction sector is likely to grow, as the government has increased outlay for highways and railways in the Union Budget 2016-17. The government increased allocation for highways by 28% and has targeted to award 10,000 km of highways in FY17.
The construction sector’s receivable days have widened by 33% to 141 days and inventory holding period has risen by close to 9% to 124 days in the last five years, says Ind-Ra.
As far as funding of infra projects are concerned, the agency says significant growth in the sector would depend on government funding as many banks have reached their internal funding limits for the sector, hence it is upon the government to explore new funding sources and structures. As the government adopted the structure to fund infrastructure projects through bilateral funding from foreign countries, like the Western Dedicated Freight Corridor is being set up using funding from Japan.
The report says, Corporate India’s performance in this fiscal will be influenced by strong GDP growth, significantly lower commodity prices and the opportunities thrown up by the government’s large number of plans to create public infrastructure.
Ind-Ra has forecasted the country’s growth at 7.9 percent in FY17 assuming an improvement in private consumer expenditure by 8.4% and gross fixed capital formation at 8.3%.
The better cash flow in construction sector will raise demand for heavy construction equipment in the country as more infrastructure projects are in the list to be implemented in years to come.
Source: Information has been obtained from report of India Ratings & Research