Credit Profile of Construction Firms Resilient Despite Covid

<span style="font-weight: 400;">The ongoing second wave of covid-19 may cause disruptions in the overall construction activity in the country, but the performance of most mid- and large-sized construction companies is not expected to be materially impacted by this, ICRA said.</span> <span style="

BY Realty Plus
Published - Apr 27, 2021 4:53 AM

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The ongoing second wave of covid-19 may cause disruptions in the overall construction activity in the country, but the performance of most mid- and large-sized construction companies is not expected to be materially impacted by this, ICRA said. In ICRA’s assessment, most of these companies are focused on non-urban infrastructure projects (roads, railways, irrigation, etc.) which are primarily located in remote areas, or at a distance from the metros. Unlike the first wave, there is no nationwide lockdown and only localized lockdown restrictions with exemptions for construction activities.Projects located within urban areas, such as metro rail projects, building construction, etc. are likely to feel a greater impact due to localized restrictions and reverse migration of labour. “While the second wave is more widespread than the first one, the government is not considering nationwide lockdown yet, given the severe economic fallout of disrupting major economic activities. With this, the reverse migration of labour has also been significantly lower thus far, compared with that witnessed during the first wave. While the situation is changing rapidly, as things stand today the disruption in construction activities is not expected to be severe," said Abhishek Gupta, assistant vice president and sector head, ICRA. Prior to the second covid wave, construction sector had started witnessing recovery and the pace of execution had crossed the pre-pandemic levels. The construction gross value added (GVA) growth of 6.2% in Q3 2020-21 and estimated growth of 8.4% in the March quarter reflect this. Due to this recovery, the construction GVA for 2020-21 is expected to contract by only 10.3%, despite a sharp 29.1% contraction in H1-FY2021, ICRA said. The recovery was driven by healthy pace of execution, supported by favorable policies from the government in terms of lowering the bank guarantee requirement, faster clearance of bills, and speedier clearances. The recent spike in covid-19 cases increases the risk of restrictions on construction activities at the localized level and curtails labour availability at project sites, which could cause short-term disruptions in construction activities. Delhi and Maharashtra both announced lockdowns, while many other states have announced weekend lockdowns that would impact the movement of labour and raw material. ICRA expects such a disruption to be limited and short-tenured, and hence has not revised its revenue growth estimates of 15-20% for 2021-21. Given that the sector had faced a more intense effect during the first wave, most companies have improved their preparedness in terms of labour and raw-material availability. Companies which are focused on construction of real estate projects would witness a higher impact, given that most of these projects will be in metro or large cities where the risk of labour migration and localized lockdown could constraint their execution. “Interactions with our rated issuers in the construction sector indicate limited or no impact thus far on project execution. Most companies rated by ICRA in the investment grade have adequate liquidity and have demonstrated the ability to ramp-up execution pace, which makes their credit profile resilient to short-term disruptions. ICRA has a 'stable' outlook on the construction sector over the medium term, supported by an adequate order book (order book-to-operating income ratio stands at over three times for most construction companies), strong pipeline of projects under the national infrastructure pipeline, as well as the measures taken by the government to support project execution," Gupta said. “We will continue to monitor the situation, especially the receivables and billing cycle, which impact the liquidity profile of the contractors."