Covid-19: Order inflow a concern for capital goods, construction companies

In a two-part series, Business Standard takes stock of order books of infrastructure companies and whether they will be able to withstand the lockdown-induced economic slowdown

As Covid-19 casts a long shadow on fresh investment, capital goods companies and construction firms in the country may be staring at a weaker order inflow this year.
 

Some capital goods companies have orders that will yield revenues lower than in the previous financial year.
 

Road-construction companies, with an outstanding order book of Rs 6,000-8,000 crore, however, can stay busy longer even if new orders dry up. The run rate of execution for capital goods companies is arrived at using a ratio of annual revenue to orders.
 

“Most capital goods companies have an order backlog for the next six-nine months. After that there will be concern on revenue visibility,” said Renu Baid, vice-president (research), IIFL. She said: “Owing to shortage of labour on the supply side and concerns on demand, with consumption and spending (capex) likely to be curtailed, I do not expect factories to run at optimal levels of 50-60 per cent before July or later than that.”

Financial details for these companies, in terms of working capital intensity and liquidity, however, tell a different story. The capital goods sector may have greater wiggle room in terms of liquidity, while most infrastructure companies may not.
 

Analysts with Reliance Securities point out infrastructure companies’ working capital is already stretched and the pandemic may worsen it.
 

“It was expected to be eased in the March quarter as payments from clients (were) to be realised during February-March 2020. Our interaction with most companies suggests that (the) working capital cycle is unlikely to ease in the near-term,” they noted in a report earlier this month. Larsen & Toubro (L&T), India’s largest engineering conglomerate, is believed to have informed its employees last week that it had lost Rs 12,000 crore so far in billing.

Most engineering companies in India are yet to reopen their factories at full capacity, with some like L&T’s Mumbai factory and Thermax’s Pune units falling in the red zones. These companies are likely to face a hit of one-third of the June quarter’s revenue, while fixed costs continue to mount. Analysts with ICICI Securities, in an April 10 note on the capital goods sector, revised working capital estimates upwards for most companies for FY21.

In the case of L&T, for instance, the number of working capital days has moved to 187, a rise of 47 from the previous estimate. For others, like Bharat Heavy Electricals (BHEL), the change is of 24 days, with the new estimate at 107. Analysts expect some capital goods companies to raise additional debt. Rating agency reports on some large capital goods companies suggest their liquidity position is healthy, strong, ample, or superior.

“The order inflow will take a massive hit for capital goods companies this year. Survival depends on leverage. Most capital goods companies do not have high leverage, which is a positive. This may not be true for construction companies,” said Nitin Bhasin, head of research, Ambit Capital.
 

This, however, may not hold true for road-construction companies, which are already stretched for funds.

Companies such as KNR Constructions, IRB Infrastructure, Sadbhav Engineering, and Ashoka Buildcon last reported their outstanding order book in the range of Rs 6,000-8,000 crore.

“The companies under our coverage continue to maintain an order book to sales ratio of 2.0-3.5 times, which provides visibility for the next 2-3 years,” analysts with Reliance Securities wrote in a note on the infrastructure sector earlier this month. While there is order execution visibility, working capital concerns remain.

IRB Infrastructure, for instance, on Sunday said the company’s board had approved raising up to Rs 2,500 crore as interim support to resume operations and meet working capital requirements.
 

In a report on liquidity for various sectors, analysts with Anand Rathi said the infrastructure construction sector had utilised 83.9 per cent of its cash credit, 66.5 per cent of overdrafts, and 29.7 per cent of demand loans. For the road transport segment, utilisation was more than 70 per cent in all the three.
 

Rating agencies’ report also suggests liquidity will stay stretched for companies like MEP and be moderate in the case of Sadbhav.

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