Construction companies ponder debt recast

Katya B Naidu  |  Mumbai  

December 13, 2013 Last Updated at 00:44 IST

With a lack of new orders & moderating cash flows, companies need a turnaround in infra projects

With Lanco Infratech's debt restructuring proposal cleared on Wednesday, construction companies in a queue for similar packages are likely to proceed.

Gammon India, with its Rs 14,000-crore debt, was recently referred to the corporate debt restructuring (CDR) cell. Soma Enterprises is coming up for discussion for a debt recast of Rs 5,000 crore. Last year, the Rs 3,300-crore debt of Hindustan Construction Company (HCC) was recast.

Lanco got a two-year moratorium on the principal payment and a 2.5 per cent reduction in interest rate. Experts hope the conditions of this CDR set a precedent for others. “The CDR conditions will come up in a way that is favourable to both the company as well as its lenders. The moratorium will definitely help but the economy has to improve, too,” said Vaibhav Agarwal, banking analyst at Angel Broking.

The number of construction companies which could go into CDR will also increase if the economy remains sluggish. “I think the peak (of the problem) has been reached and it will plateau from here. But if the slowdown continues, the rate of submissions to the CDR cell will increase,” said Agarwal.

Construction companies have been in trouble for the past two years, as orders get drier. Many projects were stuck at the approval stage. Infrastructure companies, which themselves ran into trouble, were unable to pay their contractors for engineering, procurement and construction works.

Infra projects, mostly power, have stalled due to lack of clarity on fuel, both coal and natural gas. The Adani group has said it would stop work on 6,500 Mw of capacity until clarity on coal emerges. JSW Energy has delayed a plan to expand its Ratnagiri power plant. As many generators head in this direction, it has resulted in a loss of projects for companies engaged in construction. Delay in payment to construction companies has also pushed some into debt recast -- Gammon India, for instance, has debt receivables of around Rs 2,200 crore.

Restructuring of debt could help these companies ease their cash flows and complete pending works. However, unless fresh orders start flowing in, the companies might remain in the red. “The possibility of a comeback depends on how fast the economy recovers. Most of these have existing orders but new ones will also have to flow in. The hope is that in the next one year, more projects will start giving orders, especially in the roads and the ports sector,” said Sajan Goyal, analyst at CARE Research.

A senior stock market analyst, however, writes off debt recast of construction companies as only a time-buying exercise. “The chances of comeback are very bleak. If economy does not pick up, it will all be futile,” he said.

A senior banker says there are few options for companies already in trouble. “We can't let them become non-performing assets. Debt restructuring  is always done on the hope that things will improve,” he commented.