FY19 Construction Outlook: Government Spending to Pave Road to Growth

India Ratings and Research (Ind-Ra) has maintained a stable outlook on the construction sector for FY19, underpinned by accelerated revenue growth due to increased spending by the government of India. However, the sector credit profile would witness a gradual recovery, as benefit of EBITDA expansion will be partially offset by expansion in working capital cycle due to higher scale of operations.

Ind-Ra expects a further improvement in the rating headroom in FY19 as companies in Ind-Ra's portfolio continue to record higher EBITDA and generate free cash flow. Credit profile of some of the issuers is at the higher end of the rating level, reflecting sufficient headroom to maintain the rating through the cycle.

Ind-Ra believes order inflows will continue to improve in FY19, driven by higher orders from transportation segment, led by an increase in engineering, procurement and construction contracts for roads as well as urban infrastructure projects, while order inflow from the industrial segment is unlikely to revive. Construction companies would continue to exercise bidding discipline owing to their need to protect margins and reduced competition levels for large projects.

The agency expects revenue and EBITDA margins for the sector to continue to grow and cash flows to remain positive in FY19, barring the blip in FY18 due to the transitional impact of the implementation of the Goods and Services Tax regime. Capex of construction companies is likely to increase as asset utilisation peaks and technical specification for contracts change.

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