India Ratings and Research has maintained a stable outlook on the construction sector for the financial year 2017-18 on expectation of a slow and steady growth in revenue.
The sector outlook could be revised to positive, if there is a continued improvement in cash flow margins, and thus improved credit metrics, the rating agency said.
The construction sector has seen improvement in liquidity position, with a significant improvement in cash flow from operations (CFO) in FY16, although it continued to remain negative.
A positive CFO is imperative for the sector to fund its working capital, as bank credit growth to the sector plunged over FY16-FY17, according to India Ratings (Ind-Ra)
“Liquidity is likely to improve further, with CFO improving over FY17-FY18 to reach near-zero levels,” it said.
The sector is likely to witness a gradual improvement in credit metrics, although constrained by the companies under debt restructuring showing no signs of recovery, it added.
Order inflow is likely to grow in FY18, primarily driven by increased public investment in transport and urban infrastructures, power transmission, and water and irrigation projects.
The overall allocation for roads, housing and electrification increased 18% year-on-year in the Union Budget 2017-18. However, the allocation for the National Investment and Infrastructure Fund continues to be low.
The fund was expected to leverage the initial funding multifold for investment and provide a stimulus to the infrastructure sector, which will not happen in FY18.
The sale of public private partnership projects in the roads sector has increased significantly during 2016, which is likely to continue in 2017.
“This may aid in deleveraging of balance sheets of construction companies. However, this will continue to remain a buyers’ market, given the significant demand and supply mismatch,” the rating agency said.
The sector outlook could be revised to negative, if the companies shift their focus back to public private partnership projects, leading to an increase in capital intensity without adequate equity infusions. Accumulation of large order books leading to a liquidity squeeze could also lead to the sector outlook being revised to negative.