Covid-19 impact on infrastructure capex may be worse than seen in 2008

As janta curfews and lockdowns impact ongoing projects, government spending on relief measures may limit future infra spends

The COVID-19-led slowdown is likely to hurt the prospects of infrastructure players severely. Companies, which were already feeling the heat on project execution and project closures, may face more uncertainties related to project completion, new project financing, and future order flows.

The recent channel checks by HDFC Securities show that the call for janata curfew has resulted in project sites staring at closure. Players in the engineering, procurement and construction (EPC), transmission and distribution (T&D), road construction and building segments are all seeing their projects' progress getting impacted with the Central and state governments' directives for lockdowns and curfews.

Companies' focus on employee and labour safety amidst coronavirus pandemic is another reason for project commencements taking a back seat. Sandeep Upadhyay, managing director and chief executive, Centrum Infrastructure Advisory says that EPC players may still take the cover of force majeure clause as per contractual provisions (an extraordinary event and circumstances beyond their control), and asset operators (toll roads, etc) also have some coverage under insurance. However, there will be challenges for players who have bid for projects earlier and are awaiting financial closures. Bids with a longer-term view (10-15 years), lower revenues or lower traffic may hurt their near-term financials.

The government is already under financial stress and is now allocating funds for relief measures, which in turn, may limit its ability to fund future infrastructure projects. “The government’s ability to spend on the infrastructure in next 1-2 years will get impacted,” says an analyst at a domestic brokerage.

Lower input costs with a decline in commodity prices may be among the few relief measures for players.

In this backdrop, analysts say the impact of COVID-19 stress on infrastructure capex may be worse than that seen during 2008. During the financial crisis in 2008 and onwards, the heat was felt by players on export income, while domestic revenues largely remained intact and government spending was good. Only private capex took a hit and players like ABB, Siemens, and Thermax had seen some pressure. However, with the pressure on government capex, the current slowdown is likely to get worse for the infra sector.

Thus, analysts at Emkay Global say that even after the recent correction, investors should wait before dabbling in the sector, given the continued uncertainty on infra capex growth, which is further worsened by the COVID-19 impact.

Analysts prefer companies with a strong balance sheet. While Emkay prefers KNR Constructions, Cummins India, and PNC Infratech, HDFC Securities feels KEC International, Kalptaru Power Transmission with global operations are less impacted on the execution front.