India Ratings revises outlook for construction sector to negative for FY21

India Ratings has revised its outlook for the construction industry to negative for FY21 on the back of muted order inflows and subdued bank credit flow.

The outlook revision follows significant risks emerging from the exposure of certain construction companies to the state governments of Andhra Pradesh, Telangana, Tamil Nadu and Bihar, the ratings agency said.

"There has been a higher utilisation of working capital limits, especially non-fund based facilities. Also, the delays in the sanction of additional limits is likely to adversely affect the execution capabilities and ability of infrastructure companies to bid for new orders," India Ratings' Senior Analyst Sudeep Arekar told reporters here.

The agency noted that the construction sector is heavily dependent on bank credit flow, which continues to be subdued.

According to Ind-Ra, the utilisation of fund and non-fund based limits, as a percentage of the sanctioned limits, has largely remained static in FY19 in relation to FY18, while the ratio of these limits in relation to the order books for higher rated entities continued to decline.

"Sector participants at the lower end of the rating spectrum or those with highly levered balance-sheets might face difficulties in obtaining enhancements in their working capital limits. This could hamper their ability to execute their order books in a timely manner, or bid for new orders over FY21," he added.

The agency has also maintained negative outlook for the real estate sector for the next fiscal on the back of decline in sales, negative free cash flows, stricter regulatory compliances and slowdown in lending from banks and NBFCs.

"While the commercial and retail segments are expected to perform better, residential sector will be impacted adversely. Grade 1 developers, with good track record and sales, will, however continue to perform better next fiscal," the agency's Director Ashoo Mishra said.

Further, India Ratings has maintained negative outlook for housing finance companies (HFCs) on the back of aggressive competition from banks, resulting in margins shrinking from the already modest levels.

"This is because elevated borrowing costs, both on account of the recalibration of funding mix and challenges to mobilise funds through capital market borrowings, have increased funding cost," Senior Analyst Jinay Gala said.

The agency does not expect any significant impact of the recently introduced leverage caps in the medium term, as most HFCs operate at moderate leverage levels.

"However, margin pressures along with leverage constraints would keep return on equity capped for HFCs in the medium to long term. Their ability to buffer the spreads through non-housing loans such as construction finance, lease rental discounting, loans against property or institutional lending, will diminish, as these segments are facing their own set of challenges," he added.