Coronavirus Outbreak: ICRA maintains negative outlook for construction sector for near term

Ratings agency ICRA has maintained a negative outlook for the construction sector for the near term, with revenues and order flows being significantly impacted in Q1 of the current fiscal due to the COVID-19 crisis

Press Trust of India April 10, 2020 13:02:07 IST
Coronavirus Outbreak: ICRA maintains negative outlook for construction sector for near term

Mumbai: Ratings agency ICRA has maintained a negative outlook for the construction sector for the near term, with revenues and order flows being significantly impacted in Q1 of the current fiscal due to the COVID-19 crisis.

However, as the coronavirus impact subsides and activities come back to normalcy, strong order flow under the National Infrastructure Pipeline, focus on infrastructure, and lower execution impediments should help in recovery, ICRA added.

" COVID-19 is expected to cause short term disruption to the sector with the situation likely to normalize by Q2 once the disease is contained. "However, the onset of monsoon in the second quarter of the fiscal could further push the growth to the fourth quarter of FY2021," its Assistant VP Abhishek Gupta said in a media conference call.

According to ICRA, FY20 revenue impact due to COVID-19 is estimated at 2-4 percent, with Q4FY20 impacted by as much as 8-10 percent since execution is typically higher in March month.

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Representational image. Reuters.

As billing during Q4 is higher, with operational challenges (physical verification) billing and payments from a customer can be impacted, which can result in unbilled revenue and higher working capital, it said.

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"For the current fiscal, revenue impact is estimated at 15-20 percent due to this disruption, with Q1FY21 revenue to be severely impacted. Also, new order inflows will be impacted in Q1FY21, but can pick up in the rest of FY21 once the situation normalizes," the agency said.

Based on analysis of the aggregate performance of a sample of 12 listed construction entities, ICRA noted that the degrowth in execution in nine months of FY2020 was nearly 10 percent, got intensified in Q4 FY20 and is expected to continue in Q1 FY21 as well.

Operating profitability of these listed entities, which had remained stable at 14-15 percent in the last two years are likely to reduce in Q4-FY20 and FY21.

"Overall credit metrics which was on an improving trend for the last few years will deteriorate sharply in FY21, but is expected to improve from FY22," it said.

Impact on some segments is expected to be higher, it cautioned.

Segments like real estate (residential), industrial (factory, warehousing) and mining are expected to be highly impacted due to the lockdown.

"We expect priority projects like mining or road and airport projects where the traffic is higher, will be taken up first. Also, places where there was less migration of labourers, can also be taken up once the lockdown is lifted," he said.

As far as toll road projects are concerned, collections witnessed a degrowth of 2-3 percent in FY2020, largely due to a slowdown in economy and revision in axle load norms, while COVID-19 added to the woes, it said.

According to the agency, loss to NHAI is estimated at Rs 953 crore on account of the 21-day toll suspension.

"Toll collections have been impacted in the last couple of years due to various reasons including curbs on mining, demonetisation, slowdown in economy, GST and axle load norms, among others.

"Now with the constrained movement of traffic and suspension of toll, it has further pushed the segment in negative territory. Though force majeure clause is applicable here, but there is still uncertainty over its implementation and outcome," Gupta added.

ICRA expects toll collection to decline in the range of 6.5-8 percent in FY2021.

"We are also not expecting any private investment in the sector at least in the next few quarters. NHAI's plans for selling road assets through TOT model or raising funds through launching an InvIT are expected to be pushed by a couple of quarters," he added.

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