Lockdown brings working capital burden and valuation worries for construction companies

Lockdown Brings Working Capital Burden and Valuation Worries for Construction Cos
Infrastructure investments by state governments are on the decline as they struggle to meet tax revenue targets that have slowed due to subdued economic activity on account of the nationwide lockdown.

The other impact from the lockdown is the labour shortage as migrant workers are returning home, which would delay the execution of already contracted projects and escalate associated costs for construction companies.

According to ratings arm ICRA, the receivable days — days taken to receive outstanding income by companies — may be stretched by 60-90 days for FY21.

These factors are expected to raise working capital requirements for construction companies that earn a signi cant share of their revenues from government projects.


The state governments put together have nearly 50% share in the total government expenditure on infrastructure projects. Recently, the Maharashtra government said it would be able to release only 33% of the infrastructure investment outlay for FY21due to fund constraints. Other states, too, could follow given the overall weakness in tax collections.

Another dampener for the sector is that the Covid-19 pandemic is deemed to be a non-political event.

This means any cost escalation due to delays in project execution will be borne by the construction companies. The state governments may only extend project timelines.

Given these concerns, construction companies may continue face pressure on valuations. In the past three months, the ET Construction index has lost nearly 30% whereas the benchmark S&P BSE Sensex has shed close to 16%.