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Infra Players Are Still Stretched For Working CapitalBy ugesh sarkar, Section Infrastructure
Interest rates have been slowly coming off and the liquidity situation is easing. But, for contractors, the troubles are nowhere near getting over yet.
Banks have been slow to reduce lending rates even as there is no discernible improvement in the clients' ability to pay on time. For these players, therefore, it's a double whammy. Indeed, though repeated action by the Reserve Bank of India in terms of policy rate cuts and constant urgings have compelled them somewhat to lower rates, the reductions are yet to reflect in the working capital cycle, which began expanding about six months back. In fact, say the contractors, the cycle has stretched further in some cases. For a contractor, working capital cycle is the period intervening the date it takes a loan from a bank to do some work for a client, and the date it gets paid by the client. When the client defers payment, the contractor will not only find it difficult to repay the loan on time, but also need another loan to keep work going, leading to expansion of the cycle. Real estate accounts for much of the troubles. According to Arun Sahai, chief executive officer of New Delhi-based Ahluwalia Contracts, which is a contractor for real estate developers, things are going from bad to worse. "The lending for the real estate sector has been further squeezed." Among others, Emaar MGF, which is developing the 2010 Commonwealth Games village in New Delhi, owes the company Rs 95 crore, says Sahai. Notably, the squeeze had led to the working capital cycle expanding from 90 days to 120-140 days a few months ago, which hurt the contractors working for real estate developers the most. Source: dnaindia.com Infra players are still stretched for working capital Click On "Full Story" for More...
Vineet Kashyap, managing director of B L Kashyap & Sons, 40% of whose order book is in the realty space, is also emphatic that things have not improved.Going by K G Naidu, director of finance at Hyderabad-based Gayatri Projects, things are not bad in the industrial segment, though one of his clients in the steel sector has put its expansion plans on hold for now.
For all that, however, private contracts aren't the only albatrosses the infrastructure firms are carrying. The governments are doing their bit, too. Naidu points to the inordinate delay in payments by the Andhra Pradesh government for irrigation contracts. "The working capital cycle for irrigation projects has gone up from 35 days three months back to 90 days now," he says, hoping, things would improve once a new government takes the reins. Nearly 50-60% of Gayatri Projects' Rs 5,700 crore order book is in irrigation Brijesh Koshal, head, investment banking, Daiwa Securites SMBC, says despite having adequate liquidity, banks are very cautious and do not want to take the first step. "They want the government to make the first move by making payments to contractors on time," says Koshal. Most contractors say the current working capital loan rates are around 10% compared with 14-15% four months back. Tapash Majumdar, chief financial officer, C&C Constructions, says, "If we have to access working capital funds outside banks, it will cost us 14-16%."
Most of C&C's Rs 3,000 crore project portfolio is in government contracts, says, adding, "We agree to take up contracting work for a developer only after all the funds are tied up."
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