Corporates

Construction

2013 Outlook: Indian Construction Sector

Execution - Key to Improvement
Outlook Report
Rating Outlook

NEGATIVE

Summary
Negative Outlook: 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 leverage has been adversely affected in many construction companies which have ventured into build-operatetransfer (BOT) projects due to the challenges in raising equity to fund these projects. Ratings Partly Reflect Risk: 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. Slow Order Execution: While order books continue to be strong, execution has not picked up due to various issues. Delays are seen in the commencement of execution of new projects due to delays in obtaining clearances from the government. Ongoing projects are exposed to delays due to inadequate funding and disagreements over contractual terms, leading to delays in the clearance of bills from officials. Land acquisition issues delay both commencement of new projects as well as completion of ongoing projects. Subdued Equity Markets: The slowdown in economic growth and lackluster equity markets, have resulted in the drying up of public as well as private equity. As banks are cautious in lending to the projects lacking equity funding, it has become difficult to achieve debt closures on BOT projects. 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. Increasing Working Capital: Working capital cycles have been lengthening due to delays in certification of work from clients (a pile up of work in progress) as well as in payments from clients (a pile up of receivables). This has stretched the liquidity position of companies, reflected in their high use of working capital facilities. Deteriorating Credit Metrics: The increase in usage of working capital debt and the funding of equity portion of BOT projects through debt at the parent level has led to increase in leverage. This coupled with the continued high-interest-rate regime has impacted the interest coverage ratios of construction companies. The leverage position is expected to deteriorate further for companies with large unexecuted BOT portfolios with substantial equity requirements.

Figure 1

What Could Change the Outlook

Analysts
Vinay Betala +91 44 4340 1719 vinay.betala@indiaratings.co.in Sreenivasa Prasanna +91 44 4340 1711 s.prasanna@indiaratings.co.in Aashish Bhusnurmath +91 11 4356 7252 aashish.bhusnurmath@indiaratings.co.in Ashoo Mishra +91 22 4000 1772 ashoo.mishra@indiaratings.co.in

Improved Speed of Execution: The outlook could be revised back to stable in the event of improvement in speed of execution leading to a faster turnover of order books. A successful governmental push to speed up the execution of projects through policy action can be a key event which can aid such an improvement. Improved Funds Availability: Better availability of funding (both debt and equity) and lower interest rates, leading to deleveraging and an increase in interest coverage may also lead to a revision in the outlook to stable. India Ratings expects companies with prudent growth strategies and those which have been able to generate equity to fund investment in BOT projects to continue to have stable credit

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11 January 2013

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profiles. Also pure construction companies would be better placed to withstand working capital pressures and may have better liquidity and relatively strong credit profiles.

Key Issues
Order Inflows
While order books continued to grow, order inflows stagnated during 2012. India Ratings expects order books to continue to be stagnant in 2013. Order inflows from the power sector are expected to be slow due to continued uncertainty regarding fuel availability. India Ratings expects continued order inflows from the transportation and infrastructure segments for 2013. The government has announced ambitious targets for award of orders in these sectors. However, the award process has been slow till now and a policy push is required by the government to expedite project awards. National Highway Authority of Indias (IND AAA/Stable) announcement of cash contracts is also a positive move for the industry.
Figure 2

Order Execution
While order books continue to be strong, this has not translated into revenue growth due to execution delays. Delays are seen in the execution of newly bagged projects due to delays in obtaining forest, environment and other governmental clearances and land acquisition issues. Ongoing projects are also exposed to delays due to inadequate funding of projects. Disagreements over interpretation of terms such as the escalation clauses built into EPC contracts have also led to delays in the clearance of bills in many government projects. Infrastructure projects are delayed due to continued delays in obtaining environment and other clearances and power projects are also hampered due to inadequate fuel availability. While the government has announced a Cabinet Committee on Investment to expedite large energy and infrastructure projects, the success of this proposal is yet to be seen. A successful implementation of this proposal is likely to improve order execution by expediting various approvals required for projects.

BOT Funding Issues

Even while various central and state government agencies continue to award projects on BOT basis, public as well as private sources of equity have dried up. Inability to fund the equity portion of the project cost is delaying debt closure, as banks are increasingly cautious in lending to such projects unless all approvals as well as equity are in place. Funding of equity through debt at the parent level is negatively impacting credit profiles and also leading to deterioration in liquidity. This is likely to continue in the medium term. Construction companies have also indicated their intention to divest completed projects to raise funds for investment in new projects. However, this is proving difficult due to the underperformance of such projects because of aggressive forecasts in the bidding stage and

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consequent strained returns. Furthermore, aggressively bid projects are also finding it difficult to achieve financial closure, both on the debt and equity fronts, due to concerns about viability. The governments continued emphasis on public-private partnership projects in the infrastructure sector in the Twelfth Five-Year Plan suggests that companies in this sector will still have to look at larger BOT portfolios for achieving growth in the medium term. India Ratings will continue to monitor BOT portfolios with regard to equity commitments for these portfolios and the ability of the sponsor companies to fund this commitment by raising fresh equity or through sale of completed projects.

Working Capital
The working capital position of construction companies is deteriorating. Work-in-progress has been piling up due to delays in obtaining certification of work from clients and disputes about work done. Receivables are also increasing due to inadequately funded projects and disputes about escalation bills and changes in the scope of projects. Delays in funding of equity for BOT projects is also likely to lead to stretched working capital at the parent level, who are also generally the EPC contractors for projects. This increase in working capital is leading to a stretched liquidity position for construction companies, reflected in their high use of working capital facilities. Working capital position will improve through faster execution, which in turn may be due to a policy push from the government and also through an improvement in funding availability.
Figure 3

Deteriorating Credit Metrics Increasing leverage

The increase in usage of working capital debt and the funding of equity portion of BOT projects through debt at the parent level has led to increase in leverage. The leverage position is expected to deteriorate further for companies with large unexecuted BOT portfolios with substantial equity requirements.
Figure 4

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Continued High Interest Rates

The continuance of high inflation and the consequent high interest rates during 2012, along with an increase in leverage has led to a sharp drop in interest coverage metrics. It has also impacted the financial viability of BOT projects and is leading to delays in financial closures.
Figure 5

A drop in interest rates will be beneficial to the sector, as it will ease interest burden and improve debt service coverage.

Stable EBITDA Margins

EBITDA margins remained stable during 2012 and are likely to remain stable during 2013. Construction contracts with escalation clauses will mitigate any fluctuations in prices of materials. However, companies seeing revenue contraction due to execution problems may see a fall in margins.
Figure 6

2013 Outlook: Indian Construction Sector January 2013

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Conclusion
India Ratings believes that companies which have bid aggressively to build large order books have seen deterioration in their financial positions and stressed liquidity. Unless availability of funds improve and pace of execution increases, credit metrics are likely to deteriorate further. However, companies which have demonstrated prudent growth policies by preferring quick execution over an increase in order book, and hence bid less aggressively for projects, may see their financial positions remaining stable or improving.

2012 Review
India Ratings affirmed a majority of corporate ratings in the construction sector during 2012. However, Singan Projects Ltd and Nandini Impex Private Limited were downgraded to IND D from IND BB and IND B+, respectively. Also, IVRCL Limited and Hindustan Dorr-Oliver Limited were downgraded to IND BBB+ and IND BBB from IND A+ and IND A, respectively, due to deterioration in financial profile and stretched liquidity. The Outlook on B.G. Shirke Construction Technology Pvt. Ltd was revised to Negative from Stable and that on Capital Power Infrastructure Limited to Stable from Positive, due to higher-than-expected leverage position resulting from increased working capital cycle. In view of improved financial performance and credit metrics, India Ratings upgraded EMC Limited to IND A- from IND BBB+ and revised Sri Avantika Contractors (I) Limiteds Outlook to Positive from Stable. J Kumar Infraprojects Ltds Outlook was revised to Positive from Stable due to the company diversifying into projects with higher complexity which would help the company to achieve higher and more stable operating margins on a sustained basis. G.E.T. Power Limiteds Outlook was revised to Stable from Negative due to lower-than-expected deterioration in credit metrics.

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Appendix 1: Comparison of Key Ratios of Rated Issuers
Figure 7

Peer Comparison
IOT Anwesha IOT IRB Engineering IOT B.G. Shirke Infrastructure SEW Infrastructure J Kumar & Engineering Construction & Energy Tata Projects Infrastructure Developers Infraprojects Construction Projects Technology Services Ltd Limited Limited Limited Ltd Ltd Limited Pvt Ltd IND AA-/ IND AA-/ IND A+/ Stable IND A-/ Stable IND A-/ IND A-/Stable IND A-/Stable IND A-/ Stable Stable Positive Negative FY11 FY11 FY12 FY12 FY12 FY11 FY12 FY12 12,476 31,564 20,745 31,330 9,316 1,638 4,117 15,492 2,620 2,992 2,609 13,757 1,500 316 521 2,027 449 307 1,039 5,505 366 37 125 885 568 1,813 832 5,059 681 153 220 917 5,672 1,843 21.00 5.84 2.17 1.46 29,242 2.3 410 1,548 9.48 9.73 0.14 -0.38 73,444 2.3 11,374 1,456 12.57 2.51 4.36 3.80 135,200 6.5 70,722 3,076 43.91 2.50 5.14 4.92 94,949 3.0 1,706 516 16.10 4.10 1.14 0.79 39,500 4.2 195 102 19.31 8.62 0.62 0.29 3,600 2.2 1,078 29 12.65 4.17 2.07 2.01 6,951 1.7 7,841 232 13.08 2.29 3.87 3.75 48,800 3.1 Sunil Hi-tech Engineers Limited IND BBB+ /Stable FY12 9,578 1,168 515 293 2,711 535 12.20 2.27 3.32 2.86 17,234 1.8 GVR Infra Projects Limited IND BBB+ /Stable FY12 12,426 1,676 659 663 5,904 340 13.49 2.54 3.52 3.32 38,240 2.6

Issuer Long-Term Issuer rating/Outlook Statement date Revenue Operating EBITDAR Interest expense Net income Total adjusted debt Cash and equivalent Op. EBITDAR/revenue (%) Op. EBITDAR/interest expense (x) Total adjusted debt/op. EBITDAR (x) Adjusted debt net of cash/op. EBITDAR (x) Order book Order book to revenue (x)
a

EMC Limited IND A-/Stable FY12 12,063 1,591 726 569 1,825 139 13.19 2.19 1.15 1.06 40,130 3.3

IVRCL Limited IND BBB+ /Stable FY12 (15m) 61,780 5,011 5,055 181 32,967 874 8.11 0.99 8.22a 8.01a 263,650 5.3a

Annualised Source: Company, India Ratings

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Appendix 2: Construction Companies Rated by India Ratings
Figure 8

Rated Issuers
Issuer IOT Infrastructure & Energy Services Ltd Tata Projects Limited SEW Infrastructure Limited IOT Utkal Energy Service Limited IRB Infrastructure Developers Limited J Kumar Infraprojects Ltd IOT Anwesha Engineering & Construction Ltd IOT Engineering Projects Limited B.G. Shirke Construction Technology Pvt Ltd EMC Limited IVRCL Limited Sunil Hitech Engineers Limited GVR Infra Projects Limited Hindustan Dorr-Oliver Limited Fabtech Projects & Engineers Ltd G.E.T Power Private Limited Supreme Infrastructure India Ltd Sri Avantika Contractors (I) Ltd VPR Mining Infrastructure Private Limited Raghu Infra Private Limited Savvy Projects Pvt Ltd Kamladityya Construction Pvt Ltd Siva Swathi Constructions Private Limited Triveni Engicons Pvt. Ltd Tribeni Constructions Limited Coramandel Infrastructure Private Limited NRP Projects Pvt Ltd Ksheeraabd Constructions Pvt. Ltd. Raj Infrastructural Technologies India Pvt. Ltd. Raj Infrastructure Development India Pvt. Ltd. Raj Infrastructure Pvt Ltd. Raj Promoters & Civil Engineers Pvt. Ltd. Srinivasa Construction Corporation Pvt Ltd Indus Projects Private Limited Bharat Construction Bharat Hydel Projects Private Limited Capital Power Infrastructure Private Limited SVS Mookambika Constructions Pvt Ltd SMS Infrastructure Limited Grotech Landscape Developers Pvt Ltd Delta Construction Systems Limited Nav Bharat Buildcon Private Limited GMS Elegant Builders (I) Pvt ltd RSV Constructions Pvt. Ltd. Railone Projects Private Limited Rajshekhar Constructions Private Limited Macons Infratech Private Limited Ragmet Engineers Private Limited Nandini Impex Private Limited Singan Projects Limited
Source: India Ratings

Long-Term Issuer Rating IND AAIND AAIND A+ IND A IND AIND AIND AIND AIND AIND AIND BBB+ IND BBB+ IND BBB+ IND BBB IND BBB IND BBB IND BBB IND BBBIND BBBIND BBBIND BBBIND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB+ IND BB IND BB IND BB IND BB IND BB IND BB IND BB IND BB IND BBIND BBIND BBIND BBIND BBIND B+ IND B+ IND B IND D IND D

Outlook Stable Stable Stable Stable Stable Positive Stable Stable Negative Stable Stable Stable Stable Negative Stable Stable Stable Positive Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable -

Ratings on shortterm instruments IND A1+ IND A1+ IND A1+ IND A1 IND A1 IND A1 IND A1 IND A1 IND A2+ IND A2+ IND A2+ IND A2+ IND A2 IND A3+ IND A2 IND A3+ IND A3 IND A3 IND A3 IND A3 IND A3 IND A3 IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4+ IND A4 IND A4 IND A4 IND D IND D

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2013 Outlook: Indian Construction Sector January 2013