Mumbai: Shares of construction and infrastructure firms gained on Wednesday after the Cabinet asked government agencies and public bodies to pay 75% of the money to contractors, even in case of a dispute.
The decision aims to infuse liquidity into the stressed construction sector and help create more jobs.
Hindustan Construction Co. Ltd (HCC) jumped 19.83% to close at ₹ 27.50, its biggest such gain since 5 October. HCC was also the biggest gainer among BSE-500 stocks. Other companies that rallied include Larsen & Toubro Ltd (2.71%), GVK Power Infrastructure Ltd (6.92%), Punj Lloyd Ltd (11.57%), Jaiprakash Associates Ltd (3.46%), GMR Infrastructure Ltd (2.48%), Dilip Buildcon Ltd (4.77%) and Ashoka Buildon Ltd (1.57%).
“For construction, contracts from government bodies would be relating to EPC (engineering-procurement-construction) contracts are largely linked to roads and highways. Also, government grants projects related to education, hospitals and some are stuck in various disputes," said the head of research at a domestic brokerage firm, who declined to be named.
“So, if 75% of the amount is paid, it relives some stress to that extent," he added.
The Cabinet also decided that whenever there are disputes pending between public bodies and construction contractors under the old Arbitration Act, which was time consuming, there will be an option to shift them to the new arbitration procedure which is cheaper and faster.
According to the Reserve Bank of India (RBI’s) Financial Stability Report in June, among major sectors, the industrial sector’s GNPA (gross non-performing assets) ratio increased sharply to 11.9% at the end of March 2016, from 7.3% in September 2015 .
Also read: Govt sets rules for speedy redressal of construction sector disputes
Among the major sub-sectors within the industrial sector, basic metal and metal products accounted for the highest stressed advances ratio as of March 2016, followed by construction and textiles. The stressed assets ratio for the construction sector stood at 27.1%, at the end of March quarter. Outstanding credit to the sector was ₹ 75,500 crore at the end of June.
According to the data released by Centre for Monitoring Indian Economy (CMIE), the percentage share of stalled projects in total projects has risen to 12.3% for the quarter ending March 2016, Mint had reported in April.
The March quarter saw the value of these stalled projects rise to ₹ 11.36 trillion from ₹ 10.79 trillion in December. The increase in stalled projects is primarily on account of private sector, where more than one in five investments are stalled.
Around 7.5% of the all stalled projects in the March quarter belonged to the construction sector, while manufacturing and electricity sectors accounted for 34.5% and 31.8% respectively. The government’s steps seem to have arrived at a time when the road construction industry is thriving, providing a much-needed respite.
After 10,000km of road contracts awarded in fiscal year 2016, the current fiscal year looks to be another year of opportunity for construction firms. Stiff competition has also led to lower margins in engineering and construction space, where demand is yet to pick up.
Top engineering and construction firm L&T’s operating margins have been sliding in the last three to four years, as intense competition has led to orders being taken at lower profit margins than in earlier years. Also, while new entrants to the infrastructure and construction space are doing well, the old stalwarts are weighed down with huge debt burdens, and seem to be losing the race.