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Published on 28/03/2020 12:47:19 PM | Source: HDFC Securities Ltd

Infrastructure Sector Update - Execution Coming To A Halt - HDFC Sec

Posted in Broking Firm Views - Sector Report| #Infrastructure Sector #HDFC Securities #Sector Report

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Infrastructure

Execution Coming To A Halt

Whilst our last week survey was more encouraging with our coverage universe execution largely on track, the call for ‘Janta Curfew’ has resulted in project sites staring at closure. We interacted with 15 large Indian Infra companies to gauge on the ground impact of COVID-19 on execution. The interaction covered large Road players, Building EPC players and T&D players. Large part of the halt is (1) Due to Central/State Govt directive on lock down and work from home (2) Few clients have told Contractors for closure till 31st March 2020 & (3) Goodwill towards employees’/laborers’ safety.

Execution comes to screeching halt, global players less impacted

* City centric developers with high concentration of projects in the urban areas have got highly impacted. Imposition of Section 144 by State Govts and suspension of public transport till 31st March 2020 has impacted manpower mobility. Strict checks on the same have led to Corporates scaling down operations. Larger goodwill measure regarding the health and safety of employees and laborers has also resulted in slowing down of execution by the corporates. KEC/KPTL with global operation less impacted due to works continuing in these markets.

Public transportation suspended, to impact profitability

* The suspension of long-distance trains, domestic flights and bus services has made the labor immobile. Due to Holi Holidays the labor force had reduced to 60-65%. Since then the laborers have extended their holidays. Corporates need to provide the labor contractor funds for food and other routine necessities. This is being done more on humanitarian grounds though the profitability will get impacted depending on how labor intensive the job is. Roads/Metro works are less impacted, while Buildings are more impacted.

Supply chain on wait and watch

* Our channel checks suggest that supply chains may contract further over the next 3-4 days as more State’s enforce COVID-19 lockdown and overall risk aversion and flight to safety plays out. The State borders are also getting sealed to restrict movement, only essentials items are allowed to pass. Even companies providing Bitumen, Steel, Cement etc may look at wait and watch approach as liquidity tightens. The elongation of working capital will also impact payment to suppliers. Banks are also expected to slow down disbursals due to scarcity of manpower at HO and overall reduction in execution at site.

Banking perspective – awaiting Central Bank action

* Owing to strict NPA recognition norms Banks can’t do much to alleviate the COVID-19 stress build up on Infra sector. Our channel checks with Banks suggest that Government need not provide any investment in companies. The situation can be managed by slight relaxation of NPA recognition norms, moratorium period on repayments and rate cut. Infra companies will invoke ‘Force Majeure’ as per the contract with Government clients and seek compensation for losses incurred. COVID-19 has been declared as Global Pandemic and losses can be attributed to lock down and unavailability of raw materials/manpower/labor to execute project. Even private clients have provisions to compensate contractors in case site availability is not provided. This process though will be time consuming and payments will be back ended. Stay with companies with strong Balance Sheets.

 

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