Infrastructure companies in deep crisis

Hyderabad: Infrastructure companies are headed for a dire financial crisis owing to slow project execution, drying credit lines and lower government spending on new projects — a scenario that has a ripple effect on an already slowing economic growth in the country.

“The recent increase in construction companies opting for corporate debt restructuring (CDR) would lead to financial institutions reworking their strategies.

They could reconsider credit line for construction companies. Infrastructure companies may find it difficult to get new loans and new projects may be subjected to increased scrutiny,” says Mangesh Bhadang, rese-arch analyst at Quant Broking.

On Tuesday, Hydera-bad-based IVRCL Infras-tructure has announced its plans to seek debt restructuring, joining an expanding club of highly leveraged infrastructure companies that have sought lifeline from financial institutions.

Other companies who have sought such facility include Hyderabad-based Soma Enterprise, Coastal Projects, and Indu Projects and Mumbai-based Gammon India, HCC and GTL Infra.
Adding to woes, Bhadang says the payments from the Central government may also slowdown as it hits the fiscal deficit limit, which could lead to a poor revenue flow in the fourth quarter of this financial year.

According to a report of India Ratings & Research, liquidity of construction companies has further been impacted by the Reserve Bank of India's circular of May 2013, restricting the sanction and roll-over of short-term loans.

This has reduced the flexibility of companies to fund their ad-hoc and short-term working capital requirements.

A. Ayodhya Rami Reddy has a very grim outlook for the sector and feels that some construction companies may go bankrupt.

“Slow decision making due to regulatory issues, investigation, and judicial intervention has led to situation, where thousands of crores have got stuck. Companies that have increased their overheads in view of anticipated government projects are in losses. This situation could lead to some of the construction companies getting wiped out.”

Analysts, however, do not envisage parent infrastructure companies getting shut down.

“These companies have taken up the projects in such a way that they can let their subsidies go bankrupt and save themselves.”

India plans to spend at least $1 trillion (over '6 lakh-crore) in new highways, power plants and the like in the next five years, with a large chuck going to construction projects.

However, the government may find few takers as construction companies are in bad shape. The recent tenders for projects have attracted very few companies.

The only solution to save builders, in the opinion of Reddy, is a bailout package from the government.

“A bailout package involving lowering interest rate, expeditious regulatory clearances and new orders could save the sector.”