Negative cash flow position to reach near zero level in FY17: Ind-Ra on construction companies

Order inflow in the construction sector was likely to grow as the government has increased outlay for highways and railways in the Union Budget, says the ratings agency

The cash flow position of construction companies that continued to remain negative till last year, was expected to improve and gradually to reach near zero levels in the financial year 2016-17 as more orders procured during the last two years were to be executed, India Ratings and Research (Ind-Ra) said on Tuesday.

According to the ratings agency, competitive intensity had reduced for new orders over the last two years and hence margins on such orders were expected to be higher.

Order inflow in the construction sector was likely to grow as the government has increased outlay for highways and railways in the Union Budget 2016-17. The government increased allocation for highways by 28 percent and has targets to award 10,000 kms of highways in FY17. The government has also laid out ambitious targets for spending on other infrastructure sectors and irrigation, drinking water supply, housing and power supply, whihc would entail significant opportunities for the sector over the medium term, said Vijay Betala, associate director of India Rating while citing reasons for the possible improvement in financial health of the construction companies in this report.

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"Ind-Ra believes that prudent accumulation of orders with close correlation between capacity to execute and order book size will be crucial to improvement in the cash flows and credit metrics of individual companies. Hence, In-Ra expects companies to focus on margins and funding while bidding for new projects and to limit their order books near the current level," the note said.

It also believes that the negative clash flows are a legacy of the aggressive bidding seen during FY10-12, when companies focused on building their order books. In such orders, EBITDA margins were very close or even lower than retention money margins in some case, leading to negative operational cash flows. Also, the construction sector's receivable days has widened by 33 percent to 141 days and inventory holding period has risen by close to 9 per cent to 141 days in the last five years. according to the report.