COVID-19 to slow down construction execution pace: India Ratings

MUMBAI: The lockdown imposed by the state governments of some of the large Indian cities to contain the COVID-19 outbreak is likely to obstruct the execution of infrastructure construction in them impacting revenue growth of construction companies in the near term, said India Ratings & Research..

Typically, the March quarter accounts for 30%-35% of the annual revenue of construction companies; of which a month’s lockdown can erode 8%-10%.

The ratings agency is of view that construction activities across construction hub cities such as Mumbai Metropolitan Region, Delhi, Pune, and Bangalore are likely to be stalled or progress at a significantly slower-than-anticipated pace for a major portion of March 2020 that may continue in April as well.

The companies with ongoing significant construction works in such cities are the ones likely to be the most affected, as they are turning out to be the epicentre of the outbreak. Around 75 major cities and districts in India are under a lockdown, at least till 31 March 2020.

Furthermore, a large chunk of construction workers who consequently are heading to their home towns in the interiors of the country are likely to return only after the situation normalises, which can even be a month from now or even later.

Consequently, the revenue trajectory is likely to be affected. In addition, continued expenditure in the form of overheads and finance charges is also likely to affect the profitability of construction companies, owing to a lower base for absorption of these overheads.

India Ratings and Research believes that the projects that have connectivity with the cities and areas where the lockdowns are implemented would be affected due to the trickle-down effect. Furthermore, any extensive spreading of COVID-19 in the country for a longer period can have a significant bearing on the credit profiles of the companies operating in the sector.

India Ratings and Research had revised the outlook on the construction sector to negative from stable for 2020-21 (April-March), on account of the expectations of muted order inflows in a few sub-sectors and significant risks emerging from the exposure of certain construction companies to the state governments of Andhra Pradesh, Telangana, Tamil Nadu and Uttar Pradesh.

Furthermore, with the funding woes of the banking sector and the overall fragile economic scenario, the agency expects the disbursements and sanction of additional limits to construction companies over the next few months to happen at a sluggish pace.

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