India Ratings revises construction sector outlook to 'stable'

Expecting a pick-up in execution and improved order inflows in the construction sector, India Ratings today said it has revised the outlook on the key segment for the next fiscal to "stable" from "negative".
"The sector is likely to witness a turnaround due to a pick-up in execution and order inflows on (likely) improved economic growth of 6.5 per cent in FY16. Therefore, we revise the outlook for the construction sector to stable from negative," the agency said in a report.
"Execution is likely to improve in FY16 due to improved liquidity. However, it will also depend on the materialisation of the Government's efforts to resolve the issues facing projects," it said.

"The Government has indicated its intent to resolve issues in various sectors such as fuel availability and off- take risks for the power sector, viability issues for the road sector and land availability and delays in approvals and clearances for all infrastructure and industrial sectors."
The rating outfit noted that better economic growth prospects would boost order inflows. "Order inflow is likely to pick-up in FY16, as economic growth prospects improve and industrial and infrastructure projects are launched. However, this will require a determined push by the Government to explore the resources to fund infrastructure projects and eliminate the bottlenecks in execution."

India Ratings expected the margins to ease for companies with better liquidity.

"Margins are likely to improve for companies which have liquidity for execution, as absorption of overheads improves, and due to the easing of commodity prices. They are also likely to improve due to the higher-margin orders won during the past one to one and a half years, when the competitive pressures reduced leading to rational bidding."
It expected companies to be wary of bidding for projects under the public-private partnership (PPP) model due to issues faced in execution and operation of such ventures.
"Better understanding of risks due to lower economic growth as well as restrictions placed on the companies by their boards or under their borrowing arrangements with banks will curb aggressive bidding. Given the limited award of projects under the PPP model in the last year, the pressure for additional funding is likely to ease," it said.

It said credit metrics of companies which have tied up funding plans, either through equity and asset sales or through corporate debt restructuring (CDR), will improve in the next financial year.