Despite global uncertainties and a protectionist stance adopted by developed economies, the Indian economy has been steady on its growth trajectory. Although factors such as demonetisation and weak private investment caused a dent in economic growth, which slowed down to 7.1 per cent in 2016-17, the country is expected to grow at about 7.4 per cent in the current fiscal year on the back of a revival in consumption demand and cheap borrowing costs. The labour intensive construction sector contracted in the fourth quarter of 2016-17; however, modest acceleration in the pace of project execution and the government’s push to infrastructure have strengthened the order book position of most construction companies.
India Infrastructure Research analysed the half-yearly financial performance of top 15 construction and infrastructure companies selected on the basis of their diversified presence in the infrastructure space and market capitalisation (as on November 17, 2017). These are Larsen & Toubro (L&T), NCC Limited, Sadbhav Engineering Limited, Jaiprakash Associates Limited, Ashoka Buildcon Limited, KNR Construction Limited, Hindustan Construction Company [HCC] Limited, Gayatri Projects Limited, ITD Cementation India Limited, Simplex Infrastructures Limited, Welspun Enterprises Limited, J Kumar Infraprojects Limited, JMC Projects (India) Limited, Man Infraconstruction 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.
The companies exhibited better performance during the first half of 2017-18 on the back of improved cash flow margins and a reasonable increase in order books. Besides, the government’s thrust on debottlenecking and fast-tracking projects also bode well for the companies starving for fresh projects. That said, leveraged balance sheets and stretched liquidity continue to remain causes of concern.
Financial performance
With regard to the total income of the 15 construction companies under consideration (see table), the average revenue for the first half of 2017-18 was Rs 49.4 billion, an increase of 6.12 per cent over the Rs 46.55 billion recorded in the corresponding period of 2016-17. Of the companies considered, the majority of them (12) registered a growth in their total income, while the remaining three witnessed a decline. Welspun Enterprises reported the highest increase in total income of around 266 per cent in the first half of 2017-18 on account of a significant increase in revenue from its roads and highways business. Companies such as Man Infraconstruction, Gayatri Projects, KNR Constructions, and JMC Projects (India) posted an increase of over 20 per cent. On the other hand, a fall of over 30 per cent was posted by ITD Cementation. Other companies that witnessed a decline in their total earnings were NCC Limited and J Kumar Infraprojects.
As far as total expenditure incurred is concerned, companies posted a small increase of about 2.09 per cent during the period under consideration. In the first half of 2017-18, total expenditure by these players averaged Rs 46.36 billion in contrast to Rs 45.41 billion recorded in the corresponding period of the previous fiscal year. The maximum increase of around 253 per cent was recorded by Welspun Enterprises, while others such as ITD Cementation, Jaiprakash Associates, NCC Limited, and J Kumar Infraprojects reported a fall.
With regard to net profits, most of the companies reported double-digit growth in the six months ended September 2017. The gradual recovery in the profitability of these companies kicked off in 2015-16 and the momentum has been carried forward into the first half of 2017-18. This growth was on account of factors such as increased government spending on infrastructure, better cash flows resulting from faster execution cycles, debt restructuring initiatives, asset sales (leading to capital recycling), fresh order inflows and general business optimism.
The order book position of many construction companies improved over the past two years with a major push from the government to the road, railway and urban infrastructure sectors. A case in point is Sadbhav Engineering. Its half-yearly order book stands at Rs 77.15 billion as of September 30, 2017, close to the order book position for the full year 2016-17 which was Rs 76.83 billion.
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, Gammon India, Patel Engineering and IVRCL have resorted to debt restructuring to correct their balance sheets. In fact, HCC became the first company to opt for the Reserve Bank of India’s (RBI) Scheme for Sustainable Structuring of Stressed Assets. Recently, in October 2017, lenders to IVRCL decided to invoke the strategic debt restructuring scheme due to a failure of the corporate debt restructuring mechanism. Meanwhile, RBI has sent commercial banks a list of 12 defaulters against whom insolvency proceedings need to be initiated under the Insolvency and Bankruptcy Code [IBC], 2016. The list includes three construction players – Lanco Infratech, Jyoti Structures and Era Infra Engineering.
Conclusion
The reform pace has picked up and substantive policies have been announced which include the goods and services tax legislation, IBC, 2016, the amendment to the Arbitration and Conciliation Act, and continued efforts at increasing the ease of doing business. The economy is poised for growth with the government clearing the backlog of projects, making available alternative financing instruments such as infrastructure investment trusts and bonds for infrastructure projects, and reigniting investor interest. Although consumption levels are normalising after the demonetisation shock, certain risks still persist, especially on the banking sector front. Rising stress in the banking system and stretched balance sheets of construction players require immediate attention.
