With the economy in a sluggish growth mode, the construction sector is faced with short-term challenges of increased debt levels, sluggishness in new order inflows, execution concerns surrounding their current order books and elongated working capital cycle, leading credit agency ICRA has said.
According to ICRA, while there has been an improvement in the quantum of new projects announced by the government sector in the second-half of 2011-12, this was countered by a sharp drop in new project announcements by the private sector in the same period, with the steepest decline in the period under reference. Resultant new order inflow for companies in the sector has been muted over the past two quarters.
The rating agency said despite having healthy unexecuted order books, almost all construction companies are plagued by a number of slow-moving orders due to issues related to land acquisition; securing requisite clearances; labour shortage and other sector-specific issues such as payment issues plaguing irrigation projects in Andhra Pradesh and issues faced by power projects.
The slowdown in the pace of execution can be gauged by the quantum of stalled projects, which has been steadily increasing since September 2010. As of September 2011, the quantum of stalled projects increased by 42 per cent on a year-on-year basis (15 per cent on quarter-on-quarter basis). Consequently, the year-on-year revenue growth of construction companies in the first and second quarters of 2011-12 has been the slowest as compared to the past few years. Labour shortages and government welfare schemes such as the National Rural Employment Guarantee Scheme have resulted in higher labour costs. Slower pace of execution and higher input and labour costs affected the operating profits of construction companies, ICRA said.
Keywords: construction sector