Lockdown 2.0: Some respite for construction firms, but road ahead is long

Companies with stronger balance sheet and early cycle plays like L&T, J Kumar Infra, IRB Infra, Sadbhav Engineering and NCC though may be considered on dips, say analysts

Many construction sector stocks, such as Ashoka Buildcon, Dilip Buildcon, NCC, and NBCC, have gained sharply after the government allowed certain business activities to resume amid the nationwide lockdown. While gains in April for these mid-sized companies are as high as 50 per cent, Larsen & Toubro (L&T) is up 8 per cent this month so far.

The restart of activities is positive and timely, feel experts, but further share price gains may be limited unless hurdles are cleared.

To begin with, the sector has lost precious construction time, given order inflows typically peak during the March quarter and maximum activity takes place during April-June, which coincided with the lockdown. Yet, there are over two months left before the onset of monsoon. Thus, pre-monsoon construction activities and government projects can see some progress, benefitting both companies and workers, feels Sandeep Upadhyay, managing director & CEO, Centrum Infrastructure Advisory.

As certain projects need to see adequate progress before monsoon, re-starting of activities will help. Also, companies may opt for force majeure and could get extra time for completing projects without penalty. Some relief may also come on repayment of debt, working capital, term loans, etc.

 

 

On the flip side, non-fund based limits (facilities extended by banks which do not involve immediate cash outgo but can later crystallise into financial liability), such as letter of credit, still need to be addressed, point out experts like Upadhyay. Hence, the industry will need some kind of financial package and additional relief moving forward.

The bigger issue is that many state governments haven't significantly eased the lockdown, which means that, if at all, construction activities will operate at sub-optimal levels in the near term. Issues regarding the shortage of skilled labourers also remain. Since additional care needs to be taken for the safety of workers, expect costs to rise.

In this backdrop, companies with a stronger balance sheet or those like Sadbhav Engineering, which have been selling assets to lower leverage, have an advantage. Analysts say as the focus shifts to cash flows, they prefer companies with a lower scale of operations and healthy balance sheets like Ahluwalia Contracts and KNR Constructions.

CLSA sounds more optimistic. It believes the government has little choice but to pump-prime the economy with its own capex, as the corporate tax cut failed to revive capital expenditure. Hence, the brokerage advises buying early-cycle plays, which happened to be at 10-year multiple lows, such as L&T, J Kumar Infra, IRB, Sadbhav Engineering, and NCC, following the sharp 15-45 per cent price correction from the highs.