With interest costs increasing, the interest cover ratio fell from 3.8 in Q4 FY19 to 1.4 in Q1 FY20
Subdued growth in toll collections and execution delays are risks to cash flows
Weak order flows, the general election, slow execution and a liquidity crunch have landed infrastructure stocks in the dock. Their June quarter performances, too, disappointed investors. Shares of leading road developers, such as Sadbhav Engineering Ltd, Madhucon Projects Ltd, IRB Infrastructure Developers Ltd, Ashoka Buildcon Ltd, Dilip Buildcon Ltd and Sadbhav Infrastructure Project Ltd, have slid more than 25% since April.
To be sure, the road ahead looks tough. An analysis of 20 midsize listed companies shows that risks arising from falling profit margins and rising interest costs were growing. Interest cost to sales rose from 9.8% in Q4 FY19 to 16.2% in Q1 FY20. Importantly, interest cover, which indicates the ability of a firm to service interest cost from operating profits, dipped from 3.8 times in Q4 FY19 to 1.4 times for the sample companies.
Slower growth in toll collections from BOT (build-operate-transfer) projects was worrisome. For example, traffic declined across most projects of Ashoka Buildcon in the June quarter. In some cases, new routes cannibalized existing routes and hit toll collections. Additionally, in the case of Sadbhav Engineering, a delay in interest payments led to a downgrade of its debt instruments a month ago.
Indeed, most companies boast order books that are nearly thrice their annual revenues. But this does not assure a smooth drive. Mid-sized firm Ahluwalia Contracts (India) Ltd’s revenue fell sharply during the June quarter in spite of its healthy order book. This was due to execution delays on account of elections and project-specific issues.
Tepid toll collections or even project execution delays upset cash flows for infrastructure firms. Working capital increases thereof translated into higher interest costs. Almost all firms’ interest outgo rose in double-digits, eating into their operating profits.
At this point, the odds were plenty. Motilal Oswal Financial Services Ltd, in its note on KNR Constructions Ltd, observed that the slow bank funding for hybrid annuity projects might also delay new project awards.
Furthermore, things are not looking up at the government level either. There are delays in kick-starting projects even after orders were awarded. Additionally, the National Highways Authority of India’s (NHAI’s) debt has risen in the last five years.
A note from Equirus Capital Pvt. Ltd said that while the budgetary support for the roads sector had increased to ₹72,058 crore from ₹68,563 last year, the government has urged NHAI to raise more funds through other routes. Given the global turmoil, this may be an uphill task.
There are many speed breakers for the roads sector. But one hopes a decline in traffic due to the economic slowdown, rising interest costs, delays and cost overruns don’t jeopardize the earnings apple cart.