Kotak Securities_ProjectsMonitor

Jaipur toll plaza_ProjectsMonitorAccording to a research report published by Kotak Securities though government has initiated steps to revive the construction sector like de-linking of forest and environmental clearance, working out on modalities of providing complete exit to road developers but on the ground improvement is not yet visible. “Based on our interactions with the company managements, companies are not very optimistic about sharp revival in the order inflows” the report says.

The study finds that the order inflow for most of the companies has witnessed a deterioration resulting which order books have witnessed a declining trend. As compared to FY12, road sector awards from NHAI have witnessed a sharp decline due to issues related to land acquisition as well as environmental clearance coupled with lack of interest from players for unviable BOT projects. Thermal and hydro power, industrial, railways and bridges continued to witness lackluster activity.

During Q1FY14, margins have stood a mixed bag for the companies but going forward significant improvement in margins is unlikely. According to the report increased competition, fixed overheads as well as change in project mix are likely to restrict significant improvement in margins.

Further, decline in customer advances due to lack of order inflows, higher receivables due to delays in payments from clients as well as high loans and advances to subsidiaries have resulted in increase in borrowings.

Higher cost of funds than expected and good monsoon which hamper the execution of many projects will have their adverse impact on the short term performance of construction companies. According to the report, in the medium to long term the following triggers can result in re-rating of the sector:

  • Improvement in order inflows across segments
  • Reversal of interest rate cycle
  • Faster environmental clearance and land acquisition for projects especially road and power projects
  • Reduction in borrowings by stake sale or improvement in working capital cycle
  • Financial closure of pending projects

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