Government projects keep construction units going

A majority of small and medium enterprises (SMEs) associated with the construction industry say that they are “struggling to stay afloat in the current slowdown”. With private sector projects slowing down, they are now dependent on government projects for survival, said a cross-section of industry representatives.

According to the Construction Industry Development Council, SMEs account for 40-50 per cent of the Rs 248,000 crore Indian construction industry. They are largely sub-contractors, according to K P Baney, ex-president of the Builders Association of India (BAI) and chairman and managing director of Devi Constructions.

A K Yussouf, president of the BAI, said SMEs are currently going through a difficult time because the slowdown has resulted in cancellation of orders, lack of access to working capital, drop in the number of projects and increase in the working capital cycle. He added that while private projects are slowing down, it is the government projects that are keeping SMEs running.

Government-run infrastructure projects are the focus area now, noted J P Shroff, a Pune-based builder. Despite low-profit and payment delays, companies are left with no choice but to depend on government infrastructure projects to survive, added Baney.

While there are opportunities for SMEs, access to finance is a big problem and needs to be addressed in an appropriate way. There should be easy access to long-term loans, said Shroff. Companies are not able to participate in infrastructure projects since most projects are executed through public private partnerships (PPPs), for which the companies have to put in equity.

Institutions which are ready to lend have also increased costs, and borrowing costs have increased by 150-200 basis points since January 2008, according to builders.

According to a report by Motilal Oswal Securities Ltd, in 2008-09, the net working capital cycle for construction companies increased to 145 days, from 138 days in 2006-07 and 107 days in 2005-06. Adjusting for loans and advances to subsidiary and associate companies, the net working capital cycle from core business operations increased to 128 days in 2007-08, from 119 days in 2006-07 and 104 days in 2005-06.

Baney said companies had already experiencing drops in turnover (of 10-15 per cent) as well as EBITDA margin pressures due to increased input cost, interest costs and labour cost (which has gone up from Rs 150 a day to Rs 250 for a male worker).