Construction companies are caught in a classic catch-22.
While slow execution and delays in infrastructure projects have led to a payment crisis as recovery of dues is a big challenge, banks are breathing down their necks for loan repayment.
No surprise, therefore, that construction companies lead the table of corporate debt restructuring cases.
“The government owes Rs 1.4 lakh crore (Rs 1.4 trillion) to infrastructure companies.
“Of this, Rs 8,500 crore (Rs 85 billion) is due to us.
“This should be released to infrastructure companies as soon as possible as all of us are bleeding," said Ajit Gulabchand, chairman and managing director of Hindustan Construction Co.
Those operating in the road space have borne the brunt of delays in the execution of projects because of issues over land acquisition, financial closures and environment.
As projects got delayed, the working capital cycle of the entire industry has extended and that has led many of these companies to borrow heavily.
“I do not blame the government entirely, but certainly the problems for the sector has compounded. Nothing is moving at this point in time.
“As many as 30-40 projects are stuck for financial closures," said Mukund Sapre, executive director, IL&FS Transportation Networks.
Things have worsened further as costs have gone up due to project time over-runs and companies are finding it difficult to renegotiate.
"Because of project delays, companies have seen cost escalations both in terms of fixed cost and as well as material cost like steel, oil and others,” said Sapre.
In most cases, the FY13 financial data suggest receivables and inventories account for a large part of their sales turnover indicating that large sums of money are stuck in projects and receivables.
Industry explains that in a typical case, if negotiations are going on about cost escalation, companies show such projects under inventory.
Bills are raised only when the construction work is approved by government agencies, which is why a large amount of money remained unbilled and thus appear under inventories.
Analysts, too, believe renegotiation of stalled projects has become a key issue leading to impact on payment cycle putting pressure on banks.
Apparently, companies claim these are the same banks which are promoted by the government.
If companies get their dues from the government, they can pass them on to banks and reduce debts, which are largely borrowed from public sector banks for the purpose of working capital to fund ongoing projects and receivables.
As in FY13, nine companies (see table) have total inventory and debt of over Rs 40,000 crore (Rs 400 billion) against their cumulative sales turnover of Rs 50,203 crore (Rs 502.03 billion).
Companies in the industry believe this situation could stay for a while especially in the light of elections next year.
"Outlook for the infrastructure sector is unlikely to improve in the next one-and-a-half to two years.
“The key issues are renegotiation of stalled projects, pending restructuring of Rs 3 lakh crore (Rs 3 trillion) of debt, and the government crowding out private sector due to rising subsidy bills.
“Even the best projects are reporting poor performance,” said Bhavin Vithlani who tracks the sector at Axis Capital.
Analysts said if the liquidity problems persisted for long and the interest rate environment remained unfavourable, the companies did not have any option but to default on their borrowings.
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