Coronavirus shakes foundation of construction sector; execution to be slow as migrant workers flee

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April 14, 2020 5:59 PM

With lakhs of migrant laborers rushing to their hometowns, fearing that the nation-wide lockdown would leave them with no source of earning their daily bread, the construction sector is staring into the darkness even after the lockdown is lifted. 

"The real estate sector, which is already in a slump since last year, is presently experiencing almost 65 per cent payment default from customers paying the installments linked to construction," ICC Director Rajneesh Shah said in a release.The short-term impact on the sector, according to estimates by Care Ratings, would be a 5-8% slump in revenue.

With lakhs of migrant laborers rushing to their hometowns, fearing that the nation-wide lockdown would leave them with no source of earning their daily bread, the construction sector is staring into the dark even after the lockdown is lifted.  Although construction is a critical activity, which could be allowed to resume gradually, even before the lockdown ends, the problem lies in the uncertainty hovering over construction workers returning back to work. Rating agency Care in a report said that the impact of coronavirus on construction sector will be manifold and the timely return of labour makes up for a huge challenge. 

The short-term impact on the sector, according to estimates by Care Ratings, would be a 5-8% slump in revenue as construction work halts completely for the better part of the first quarter of the current fiscal year. “The execution would be tepid in Q1FY21 and would further continue with the onset of the monsoons at the start of Q2FY21 when the construction activities are low due to weather conditions,” Care Ratings said. The second half of each year, accounts for 60% of revenue generated by the construction sector, the same is estimated to be cut by 30% based on the current situation. Further, it is estimated that from the start of work post the lockdown may take close to 2 months to resume at full force. 

Collections for the sector will be hit due to the lockdown that was imposed in the last days of March. “Major part of collection is clustered in the last fort-night of March and hence the collections are likely to have been tepid during this period leading to high level of working capital borrowings at the end of March 2020,” the report said.  Even the future looks grim for the construction sector as clients hit by the coronavirus might delay payments even after normalcy resumes. 

Amidst all this, fixed costs, comprising employee expenses, rentals and basic expenditures for the sector will provide no breather. Although the majority of the companies are likely to opt for the moratorium proposed by the RBI, the slower cash flows will only make it tougher to service interest and principal payment in the future. “At the end of the moratorium period, there would also be an increase in the bank charges for bank guarantees (BGs) and interest expense on mobilisation advances. Mobilisation advances get repaid with the billings for the work done. As such, with halting of all activities, the progress of work to come back to its flow will take some time and additional finance cost on extended period of mobilisation advances along with extension of BGs utilised for availing the same, will further assert pressure on profitability of companies,” the report added.

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