India Ratings: Construction Sector Outlook Negative on Deteriorating Credit Metrics

By Accommodation Times News Services

India Ratings-Chennai-11 January 2013: India Ratings has revised its Outlook on Indian construction companies to Negative for 2013 from Stable in FY12. This is due to continuing challenges in order execution which have resulted in stretched working capital. Liquidity as well as financial leverage has been adversely affected in many construction companies which have ventured into build-operate-transfer (BOT) projects due to the challenges in raising equity to fund these projects.

The rating levels of India Ratings-rated construction companies have already factored in some of the execution risks; this contributes to the high proportion of Stable Outlooks. Some companies with deteriorated credit metrics also have Stable Outlooks as India Ratings has already taken sufficient action to accommodate foreseeable stress.

India Ratings continues to be concerned about continuing slow project execution, despite construction companies’ strong order books. Delays are seen in the commencement of execution of new projects due to delays in obtaining forest, environment and various other clearances from the government. Ongoing projects are also exposed to delays due to inadequate funding and disagreements over contractual payments, leading to delays in the clearance of bills from officials. Land acquisition issues also interrupt both commencement of new projects and completion of ongoing projects.

Tying up equity and debt funding for BOT projects has also become difficult. Construction companies are finding it increasingly difficult to raise equity and are funding equity requirements of BOT projects by borrowing at the parent level, adversely impacting the parents’ credit profiles. This is likely to continue in the medium term.

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