Construction sector sees most CDR cases: ICRA

Mumbai, April 08,2014 – Companies in the construction or infrastructure sectors form the highest proportion of Corporate Debt Restructuring cases approved in FY13 and first half of FY14, according to rating agency ICRA.

Delay in environmental clearances, high land acquisition costs and increased due diligence by lenders has contributed to putting the Indian construction sector in a tight spot, ICRA said in a report on the construction sector.

Sector-specific issues like mine development permissions, fuel supply shortages, precarious financial health of distribution utilities in case of the power sector, security clearances and tariff-related impediments for the port sector and dwindling interest from private sector participants, coupled with increasing difficulties in achieving financial closure for the road sector, were the additional factors that led to this trend, according to the rating agency.

Private sector capex too has been witnessing a declining trend since Q1 FY11 said ICRA. For nine months of FY14, new project announcements by the private sector de-grew by 70 per cent year-on-year against 45 per cent year-on-year decline in FY13, due to “issues faced in land acquisition and securing requisite approvals and clearances, deferral of capex plans and overall subdued business confidence.”

Project execution challenges and muted revenue growth rates for Indian construction companies are expected to persist at least up to September , the agency has said.

Rohit Inamdar, Senior Vice-President, ICRA, said: “We expect revenue pressures to continue in the first half of FY15, post which the improvement in investment cycle could be closely linked to the election outcome and perceived stability of the new Government.”

This weak guidance is on the back of poor performance of companies in infrastructure sub-sectors like roads, airports and power, which have not been able to achieve their set business targets in FY13, according to the report.

However, the Dedicated Freight Corridor (DFC) project is expected to provide significant opportunities to construction companies. “Two contracts worth Rs.10,000 crore have recently been awarded under this project, and for each of these contracts, the land acquisition is in excess of 95 per cent which could support project execution,” said the ICRA report.