Despite a slowdown in awarding projects in the transport and irrigation sectors, India Ratings has maintained a stable outlook for the construction sector for the remainder of FY20 mainly on the back of the current order book position.
Most construction companies are likely to experience healthy revenue growth and stable credit metrics over H2 FY20, underpinned by the strength of their existing order books, Ind -Ra said in a statement.
The agency noted that the likely slowdown in the new order inflows in the roads, bridges and highways and the irrigation segments would be compensated by strong order inflows from the urban infrastructure including housing, metro, water supply, sewage treatment and railways segments.
India Rating opined that companies focused on the road EPC sub-segment are likely to experience minimal developments with respect to their ratings during H2 FY20, as they would continue to execute their order book in a timely manner, supported by their strong execution capabilities and timely realisation of receivables, resulting from the presence of strong counter parties in their order book.
"The overall improvement in the financial profile of construction companies are more likely to be determined by their ability to manage their existing working capital resources in a prudent manner, given the working capital- intensive nature of the sector and the increasing risk- averse approach adopted by lenders towards the construction sector," the rating agency added.
However, the agency noted that the revenue visibility of these companies might be affected by the slow pace of awarding for road projects, which remains a key rating monitorable.
"Meanwhile, players who are focussed on rail EPC works, including metro, irrigation and urban infrastructure projects are likely to benefit from their expertise in the respective sectors, combined with the priority attached to such projects by the government," it said.
The agency also expects companies to deleverage gradually over FY20, as benefits from an increase in scale would be partially offset by the rise in working capital requirements.
However, the process of deleveraging might be delayed for the companies that have not been able to achieve financial closure or have experienced delays in receiving appointed dates, which would worsen their net cash conversion cycles, it said.
In addition, the cash flow from operations of construction companies are likely to moderate over FY20, as working capital requirements would increase in line with the growth in scale.
"Despite this, we expect the overall cash flows of EPC companies to remain positive in the absence of any major planned capital expenditure to support their order books in the second half of the fiscal," Ind-Ra said.