Rise in fiscal deficit likely to impact construction sector this yr: Report

Even as construction activities in the country have resumed since July, increase in fiscal deficit of central and state governments is likely to impact the sector this financial year, according to India Ratings (IndRa).

The agency had recently noted that the fiscal deficit of central and state governments will come at 12.1 per cent with the states contributing 4.5 per cent of it.

"An increase in central and state government fiscal deficit in FY21 can impact both order inflow and collection in the sector," India Ratings said in a release.

After almost three months of the Covid-19 pandemic-induced lockdown, the country entered the unlock mode from June 1, with the government lifting restrictions gradually and almost all economic activities resuming from July.

The agency said revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins of engineering, procurement and construction (EPC) companies would decline around 15 per cent and 200 basis points, respectively, this fiscal as against FY2020, as the lockdowns would reduce the project execution pace.

"However, the demand drivers seem to be healthy, with medium-term revenue visibility at end-FY2020," it noted.

The order book of the top 18 EPC players declined six per cent year-on-year in FY20, after registering extraordinary growth during FY16-FY19, in which it almost doubled to Rs 2.1 trillion from Rs 1.2 trillion.

"Players with focus on road, building and metro registered significant growth in their order book during FY16-FY19," India Rating said.

The agency noted that while growth in the road segment was supported by government plans to increase the pace of road construction in the country to 30 km per day in FY19 from 15-16 km per day in FY16, the building and housing segment was supported by Pradhan Mantri Awaas Yojana (PMAY) scheme.

"Players with focus on housing and metro projects registered significant growth in FY20. Overall, the order book or revenue, though declined to 2.6x in FY20 from the peak of 3.28x in FY18, remained healthy," it said.

The agency further said that debtor days increased slightly in FY20 to around 113 days from 107 days in FY19.

"However, the overall working capital requirement in the industry, exacerbated due to the lockdown in March 2020, increased which was mainly funded by debt," it said.

According to IndRa, flattish EBITDA and higher debt resulted in return on capital employed for the sector declining to 14.2 per cent from 16.9 per cent in the same period, while also deteriorating the credit metrics slightly.