Order book likely to improve in construction sector in FY17
20/04/2016 14:46
Construction companies continued to witness negative cash flows from operations (CFO) in FY16, which is likely to improve gradually to near zero levels in FY17, as more orders procured during the last two years are executed, says India Ratings and Research (Ind-Ra). Competitive intensity had reduced for new orders over the last two years and hence margins on such orders are expected to be higher, said the rating agency. According to Ind-Ra report, order inflow in the construction sector is likely to grow, as the government has increased outlay for highways and railways in the Union Budget 2016-17. The government increased allocation for highways by 28 per cent and has targets to award 10,000 kms of highways in FY17. The government has also laid out ambitious targets for spending on other infrastructure sectors and irrigation, drinking water supply, housing and power supply, which would entail significant opportunities for the sector over the medium term. Ind-Ra believes that prudent accumulation of orders with close correlation between capacity to execute and order book size will be crucial to improvement in the cash flows and credit metrics of individual companies. Hence, Ind-Ra expects companies to focus on margins and funding while bidding for new projects and to limit their order books near the current level as a multiple of revenue, which will provide for a moderate growth in revenue along with improvement in cash flow margins. Ind-Ra believes that the negative CFOs are a legacy of the aggressive bidding seen during FY10-FY12, when companies focussed on building their order books. In such orders, EBITDA margins were very close or even lower than retention money margins in some cases, leading to negative operational cash flows.
20/04/2016 14:46
Construction companies continued to witness negative cash flows from operations (CFO) in FY16, which is likely to improve gradually to near zero levels in FY17, as more orders procured during the last two years are executed, says India Ratings and Research (Ind-Ra). Competitive intensity had reduced for new orders over the last two years and hence margins on such orders are expected to be higher, said the rating agency. According to Ind-Ra report, order inflow in the construction sector is likely to grow, as the government has increased outlay for highways and railways in the Union Budget 2016-17. The government increased allocation for highways by 28 per cent and has targets to award 10,000 kms of highways in FY17. The government has also laid out ambitious targets for spending on other infrastructure sectors and irrigation, drinking water supply, housing and power supply, which would entail significant opportunities for the sector over the medium term. Ind-Ra believes that prudent accumulation of orders with close correlation between capacity to execute and order book size will be crucial to improvement in the cash flows and credit metrics of individual companies. Hence, Ind-Ra expects companies to focus on margins and funding while bidding for new projects and to limit their order books near the current level as a multiple of revenue, which will provide for a moderate growth in revenue along with improvement in cash flow margins. Ind-Ra believes that the negative CFOs are a legacy of the aggressive bidding seen during FY10-FY12, when companies focussed on building their order books. In such orders, EBITDA margins were very close or even lower than retention money margins in some cases, leading to negative operational cash flows.
