India Ratings

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India Ratings: Construction Sector Outlook Negative on Deteriorating Credit Metrics

Jan 11, 2013

India Ratings has revised its Outlook on Indian construction companies to Negative for 2013 from Stable in FY12. This is due to continuing challenges in order execution which have resulted in stretched working capital. Liquidity as well as financial leverage has been adversely affected in many construction companies which have ventured into build-operate-transfer (BOT) projects due to the challenges in raising equity to fund these projects.

The rating levels of India Ratings-rated construction companies have already factored in some of the execution risks; this contributes to the high proportion of Stable Outlooks. Some companies with deteriorated credit metrics also have Stable Outlooks as India Ratings has already taken sufficient action to accommodate foreseeable stress.

India Ratings continues to be concerned about continuing slow project execution, despite construction companies’ strong order books. Delays are seen in the commencement of execution of new projects due to delays in obtaining forest, environment and various other clearances from the government. Ongoing projects are also exposed to delays due to inadequate funding and disagreements over contractual payments, leading to delays in the clearance of bills from officials. Land acquisition issues also interrupt both commencement of new projects and completion of ongoing projects.

Tying up equity and debt funding for BOT projects has also become difficult. Construction companies are finding it increasingly difficult to raise equity and are funding equity requirements of BOT projects by borrowing at the parent level, adversely impacting the parents’ credit profiles. This is likely to continue in the medium term.

The execution and funding issues are resulting in lengthened working capital cycles. This has stretched the liquidity position of companies, reflected in their high use of working capital facilities. This has also contributed to an increase in financial leverage, which coupled with the continued high-interest-rate regime, has led to lower interest coverage ratios.

However, India Ratings expects companies with prudent growth strategies and those which have been able to generate equity to fund investment in BOT projects to continue to have stable credit profiles. Also, pure construction companies would be better placed to withstand working capital pressures and may have better liquidity and relatively strong credit profiles.

The outlook could be revised back to stable in the event of a successful governmental push to speed up the execution of projects through policy action, leading to a faster turnover of order books. Better availability of funding (both debt and equity) and lower interest rates, leading to deleveraging and an increase in interest coverage, may also lead to a revision in the outlook to stable.

Construction companies rated by India Ratings include IOT Infrastructure & Energy Services Ltd (‘IND AA-’/Stable), Tata Projects Limited (‘IND AA-’/Stable), SEW Infrastructure Limited (‘IND A+’/Stable), IRB Infrastructure Developers Limited (‘IND A-’/Stable), IVRCL Limited (‘IND BBB+’/Stable) and Hindustan Dorr-Oliver Limited (‘IND BBB’/Negative).