Construction: Return of execution risk

Liquidity crunch and expected credit tightening by banks after the loan scam raise the execution risk.

Subdued financial performance in the first half of the current financial year has kept stocks of construction companies under pressure as they face various challenges on the execution front.

The recent bribe-for-loan scam and the liquidity crunch have only increased the risk. However, construction companies are expected to record strong numbers in the second half of the current financial year, backed by a robust order book.

Analysts fear banks may tighten credit supply to the companies after the scam. This is in addition to the current liquidity crunch in the financial system, which has prompted the Reserve Bank of India to take measures to ease liquidity. Since the construction sector is highly working capital-intensive, both the events will not only hurt execution but also profitability due to a spike in interest costs.

Over the last one week, realty stocks have corrected by 7.5 per cent on an average. The Hindustan Construction Company scrip tanked more than 30 per cent after the Ministry of Environment and Forests served a notice to Lavasa on charges of violating environmental norms.

However, analysts feel the recent correction has been overdone and see it as a good buying opportunity. They consider large companies with lower gearing (up to 1.5 times) and/or higher presence in the operational road build-operate-transfer projects as safer bets.