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Mumbai, Jan. 13: The construction sector will continue to reel under the pressure of sluggish demand and face difficulties in raising finances this year, a rating agency has said.
According to India Ratings, a Fitch group company, order books of construction firms are likely to remain stagnant this year after languishing in 2012. Order books of domestic companies stood at Rs 2,94,800 crore in 2011-12 compared with Rs 2,68,300 crore in the preceding fiscal.
Companies are likely to receive orders from the transportation and infrastructure sectors during the calendar year. However, order inflows from the power sector could be slow because of uncertainty over fuel availability.
Vinay Botala, analyst at India Ratings, said in a report that while stagnancy in order books remained a challenge, the key issue is its execution or implementation.
Order execution has not picked up because of various factors. “Delays are seen in the commencement of execution of new projects because of delays in obtaining clearances from the government. Ongoing projects are exposed to delays because of inadequate funding and disagreements over contractual terms. Land acquisition issues delay both commencement of new projects as well as completion of ongoing projects,” he said, adding that execution delays are one of the key factors behind good order books not translating into revenue growth for these companies.
India Ratings, which has lowered its outlook on the sector to negative from stable for this year, indicates the industry also faces difficulties in raising finance this year.
The economic slowdown has led to the drying up of public and private equity funds. Banks have turned cautious in lending to projects lacking equity funding, thereby making it more difficult to achieve debt closures particularly in built-operate-transfer (BOT) projects.
Another sign of a weak credit outlook is that at the parent level, the equity portion of a project is being funded through debt.
“The increase in the use of working capital debt and the funding of equity portion of BOT projects through debt at the parent level has led to increase in leverage. The leverage position is expected to deteriorate further for companies with large unexecuted BOT portfolios with substantial equity requirements,” the India Ratings said. Leverage, put simply, is the amount of debt used to finance a company’s operations or assets.
According to the rating agency, a rise in work-in-progress and receivables has also adversely effected the working capital position of construction firms.
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