Why do construction firms appear to be in a better position for the second wave?

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Why do construction firms appear to be in a better position for the second wave?

The impact of the second wave of the pandemic is expected to be limited on construction companies due to the localised nature of lockdown, lower reverse migration of labour and better liquidity position of companies. This would be unlike during the first wave a year ago when a nationwide lockdown had jeopardised the economy.

Analysts have not yet turned extremely bearish on the execution of orders by construction companies. According to a recent report by JM Financial based on an interaction with National Highway Authority of India (NHAI) officials and construction companies, the majority of the project sites are operating with 70-80% labour strength since there is no mass migration of labourers as seen last year.

An analyst who wished to be unnamed said, “Today, construction companies are using labourers in and around the project site. So, labourers reside at sites to ensure execution is not impacted. Also, in the event of a lockdown, execution will not be hurt as the government allows the construction of all infrastructure projects.”

The rating agency ICRA noted in a report that most projects are located in non-urban areas. And therefore will face lesser disruptions in execution compared with urban areas.

Besides, companies are well prepared in terms of funding this time around when compared with a year ago. Abhishek Gupta, assistant vice-president, sector head at ICRA, in its industry report observed, “Interactions with our rated issuers in the construction sector indicate limited or no impact thus far on project execution. Further, most companies rated by ICRA in the investment-grade have adequate liquidity and have demonstrated the ability to ramp-up execution pace, which makes their credit profile resilient to the short-term disruptions.”

In addition, order flow has been encouraging over the past two quarters. The current average order book-to-bill ratio is over three, which ensures higher revenue visibility.

Given these factors, ICRA has maintained its revenue growth estimate of 15-20% for FY22 for large-and-mid-sized construction companies notwithstanding the second wave of the pandemic. Analysts believe that companies such as KNR Constructions, PNC Infratech, Dilip Buildcon and Ashoka Buildcon are likely to show stable growth in revenues in the next year.

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