Construction: rising challenges, falling fundamentals

Construction: rising challenges, falling fundamentals

Mark-to-Market’s data analysis of 109 companies in various areas of construction—including roads, bridges, commercial spaces and engineering, procurement and construction (EPC)—highlight the woes faced by the sector.

The shocker in 2012 was that revenue growth slowed to single digits, 8%. This was in spite of most companies having a strong order book from past contracts.

Leading infrastructure construction companies such as Gammon India Ltd and NCC Ltd (Nagarjuna Construction Co. Ltd) displayed flat revenue growth, and IVRCL Ltd registered a 12% drop in revenue.

Tight liquidity conditions and payment delays by clients led to lower billings even in the March quarter, which is normally the best in a year for this sector.

“For contractors, expansion in working capital is a major contributory factor impeding execution, with contractors trying to match the pace of execution," says an India Infoline Ltd, or IIFL, report. For these mid-sized firms, execution is the key to build revenue momentum that can cover costs.

Increased working capital together with payment delays by clients squeezed the profitability of construction firms as interest rates and, hence, costs climbed steeply last year. In fact, on average, interest cover (profit/interest cost) has halved from 3.8 three years ago to 1.8 in fiscal 2012.

The outlook is unlikely to improve in fiscal 2013 since interest rates appear sticky and funding constraints remain. To add to the woes, the financial closure of infrastructure projects has become tougher and long-drawn. Public projects, too, are in a quagmire because of clearance delays.

An Edelweiss Securities Ltd report says that competition will reduce as companies face difficulties in tying up project finances.

So far, road projects seemed to be more investor-friendly. But a new regulatory framework is on the anvil with stricter clauses—defect liability period, penalty for each day of delay from the contractor’s end and onus of cost-overruns on contractors.

The valuations of construction firms indicate that the market sees no sign of an early recovery.

Also See | Subdued phase (PDF)

PDF by Prajakta Patil/Mint