Negative growth for construction sector predicted in second half of 2013

Chennai:

The second half of the financial year is not too rosy for the construction sector and the sector will continue to face execution and liquidity challenges, according to India Ratings & Research.

The ratings agency has maintained a negative outlook on the Indian construction sector for the second half of 2013 as it believes construction companies have concentrated more on the execution of existing orders than over-bidding.

Delays in obtaining statutory clearances and increasing working capital needs continue to put pressure on the financial profile of the companies in this sector. This has been compounded by the inability to pass on input cost increases which has resulted in a fall in EBITDA margins, again a trend that is likely to continue in the near term.

Working capital cycles continue to be stretched on account of delays in the certification of works completed by construction companies. Higher debts for executing large order books and to fund working capital along with high interest rates have led to further deterioration of the credit metrics of the companies. Given the downward pressure on margins and higher requirements for funds, the agency expects that credit metrics may worsen further in the near term. 

India Ratings believes that faster order execution and liquidity easing are key to a stable outlook. Better availability of funds and governmental policy actions addressing the factors hindering speedy execution of works would have a positive impact on the industry. Restricting order books to a manageable level, especially by fund starved companies, can lead to liquidity easing and improvements in credit metrics.