Mixed Performance: Contractors impacted by slow order inflow

Contractors impacted by slow order inflow

The role of contractors in the construction sector has undergone a change over the years with many of them making forays into infrastructure development. Subcontracting is gaining traction and a given project may be developed via several small contracts. Some projects may require expertise in several specific areas of construction, which a single contractor may not be able to provide.

Indian Infrastructure analyses the annual financial performance of selected construction companies.

Financial performance

The annual financial performance of 15 construction companies selected based on their diversified presence in the infrastructure space and market capitalisation is analysed here. These companies include Larsen & Toubro (L&T), Lanco Infratech Limited, Nagarjuna Construction Company [NCC] Limited, Sadbhav Engineering Limited, Ashoka Buildcon Limited, Hindustan Construction Company (HCC) Limited, IVRCL Limited, IL&FS Engineering and Construction Company Limited, Pratibha Industries Limited and Punj Lloyd Limited. While most of these companies are engineering, procurement and construction (EPC) players, many of them have also forayed into the infrastructure development space.

With respect to the total income of the 15 selected companies (Table 1), the aggregate revenue for the year 2015-16 was Rs 1,615.67 billion, a subdued increase of 3.52 per cent over the Rs 1,560.72 billion recorded in 2014-15. Among the companies under consideration, nine registered a growth in their total income, while the remaining witnessed a decline. Pratibha Industries Limited reported the highest increase in total income of around 38.4 per cent in 2015-16. Companies such as Madhucon Projects Limited, Sadbhav Engineering Limited, L&T and Ashoka Buildcon Limited posted an increase of over 10 per cent. On the other hand, a fall of over 40 per cent was posted by Punj Lloyd Limited. Other companies that witnessed a decline in total earnings were Supreme Infrastructure India Limited, Lanco Infratech Limited, IVRCL Limited, HCC Limited, and IL&FS Engineering and Construction Company Limited.

Stretched balance sheets and a slowdown in the pace of project execution present a grim situation in the construction landscape. Players have refrained from bidding for new projects, particularly in sectors such as power and roads, which in turn has impacted the volume of subcontracting. The scenario has resulted in stressed cash flows, which has meant that order backlogs have not been cleared. These factors have contributed to sluggish income growth.

The order books of most of the players reflect diversified portfolios. During 2015-16, many businesses such as Madhucon Projects, Supreme Infrastructure, and IVRCL experienced a dip in their order book position. Ashoka Buildcon, HCC, and Gayatri Projects were among the few companies that saw some growth.

As far as total expenditure incurred is concerned, the companies posted an increase of about 3.4 per cent during the period under consideration. In 2015-16, the total expenditure by these players aggregated Rs 1,464.62 billion, in contrast to Rs 1,416.46 billion recorded in 2014-15. The maximum increase of around 42 per cent was recorded by Pratibha Industries; others such as Punj Lloyd, Supreme Infrastructure India, HCC, and Lanco Infratech reported a fall.

In terms of capital structure, all the companies under consideration remained highly leveraged. As of March 31, 2016, the median debt-equity ratio for these players worked out to be as high as 6.97, unchanged from that in 2014-15 (which increased from a debt-equity ratio of 5.01 recorded at the end of 2013-14). Companies such as Lanco Infratech, HCC, IVRCL, and Gayatri Projects posted their debt-equity ratio above the group’s median.

During 2015-16, the operating profit margin (OPM) showed a decline. The median OPM of the 15 companies was 10.49 per cent. It is evident that increasing variable costs of operations over the years have depressed the operating profits of these companies.

Project delays caused by issues related to land acquisition and government clearances in recent years have constrained corporate cash flows and made it difficult for borrowers to repay debt. As result of this, players such as HCC Limited and Gammon India Limited have resorted to debt restructuring to correct their balance sheets. In fact, HCC Limited became the first company to opt for the Reserve Bank of India’s Scheme for Sustainable Structuring of Stressed Assets.


Recovery in the construction sector is likely to be gradual as most players are still burdened with leveraged balance sheets and the volume of stalled or slow moving projects remains sizeable. The government’s recent demonetisation move has led to an influx of deposits in the banking system which is likely to bring down borrowing costs in the medium term. This will aid financially stressed construction players in receiving funding at a lower interest rate.

Further, mega initiatives such as the Smart Cities Mission, Make in India and the Sagarmala project bode well for the construction sector as they offer greater opportunities to EPC players. The government has also laid significant emphasis on pushing stalled construction projects. Towards the end of its term in 2019, the government is expected to become aggressive in reviving activity in the sector, which will translate into fresh opportunities for construction players.