COVID-19 impact: Near-term cash flow stress expected in construction sector, says Icra

New Delhi: Significant near-term cash flow stress is expected in the construction sector due to Covid-19 impact, rating agency Icra said on Tuesday. It said that the companies which are into high capital-intensive segments like mining, etc and those undertaking overseas ventures will see higher pressure if their projects get stalled.
"The Covid-19 (novel coronavirus) pandemic impact has led to the stalling of activity and this disruption will have a negative impact on the operating income, profitability, and liquidity position of construction companies in the short term. While timely measures from the Government and lenders can help provide the liquidity to cash-starved entities, performance of the companies can come under pressure in the near term," Icra said in a statement.

Shubham Jain, Senior Vice President and Group Head, Icra said, "Even before the complete lockdown was implemented in the country for preventing the spread of Covid-19, some states had started putting restrictions in place. Some of the states have also announced relief packages to provide financial support to day labourers and construction workers".

Recent developments witnessed labourers migrating to their home towns, thus impacting construction activities, he said.

Disruption in the second-half of March 2020 will result in modest revenue growth/de-growth in Q4-FY2020, it said, adding the major impact is expected in Q1-FY2021 with construction activities stalled during the first half of April-2020.

"Even if the lockdown is not extended, increased risk aversion could result in labour shortage in the first quarter as the return of the migrant labourers will be gradual. Further, as mining activities and manufacturing plants have also shut down, raw material availability could also emerge a constraint," the statement said.

Most construction contracts contain force majeure clauses which will entitle the contractors an extension of timeline (EOT) in the project completion schedule, it added.

Nevertheless, the idling of machines, manpower, and other fixed costs will impact the profitability and liquidity of contractors in Q4-FY2020 and Q1-FY2021, Icra said. NAM NAM BAL BAL