Covid effect: Construction investments to decline 12-16% in FY21

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Published: June 5, 2020 7:37 AM

The first quarter of April-June 2020 is expected to be a complete washout, as construction firms struggle in arranging transportation and accommodation for labour, maintaining social distancing on construction sites, obtaining clearances from district officials for inter and intra district projects, and ensuring raw material availability.

The estimates factor in lower spends by the state and central governments as most of their resources are expected to be diverted to healthcare, public welfare and social obligations.

Construction industry in India is expected to witness a 12-16% contraction in investments in the current financial year to Rs 7.3 lakh crore from Rs 8.6 lakh crore in financial year 2019-2020. The revenues and operating margins will also take a beating during the year, with the bulk of construction activity expected to resume only from the third quarter of the financial year.

The estimates factor in lower spends by the state and central governments as most of their resources are expected to be diverted to healthcare, public welfare and social obligations. According to ratings firm Crisil, this comes at a time when government finances are strained and gross budgetary support is expected to decline due to lower revenue receipts. The contraction also factors in the lockdown impacting construction activity and movement of labour in the first half of the current financial year.

Allocation to infrastructure for FY21 has moderated even for states with higher spends on the sector. Uttar Pradesh, Maharashtra and Gujarat, which account for 26% of the pie have seen a decline in outlay compared to previous financial year, while for Karnataka, Tamil Nadu and Madhya Pradesh, which account for 24%, it is flat.

It is estimated that with the construction activities deferred, industry players are expected to see a 13-17% drop in revenue during the year, while the Ebitda (earnings before interest, tax, depreciation and amortisation) margins are estimated in the range of 4-6% for the financial year, down from 7-9% last year.

The first quarter of April-June 2020 is expected to be a complete washout, as construction firms struggle in arranging transportation and accommodation for labour, maintaining social distancing on construction sites, obtaining clearances from district officials for inter and intra district projects, and ensuring raw material availability.

Bulk of the construction activity will resume from the third quarter of the financial year as industries such as transportation, quarrying, steel, cement, and forging needs to be operational for meeting raw material requirements of the construction sector. “Add to this the workforce issues and the need to have permits and clearances in place before construction can resume, the sector is going to take time to return to normalcy even after the lockdown is lifted”.

According to Crisil, the share of private spending has fallen 26% in financial year 2009-2010 to 17% in 2019-2020. This is on the back of failure of public private partnership taking off in most infrastructure sectors, except airports and roads, due to private entities having to bear majority of the risks in PPP models.

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