Working capital cycle stretches for infra cos

Interest rates are on the wane. But, infrastructure firms can’t quite smile yet. The reason: their working capital cycle has expanded.

Headache goes; heartburn begins.

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 the work going, leading to expansion of the cycle.

In the last six months, construction companies have seen their working capital cycles increase by 50% or more as clients defer payment.

Vineet Kashyap, managing director of New Delhi-based B L Kashyap & Sons, said the market tightness has led to the cycle expanding from 90 days to 145 days for his firm.
According to Kashyap, if a contractor does not receive payment within 180 days, the bank stops lending for that project.

Nearly 40% of B L Kashyap’s order book is in the realty space.

S Ramnath, senior vice-president of Chennai-based Shriram EPC, said the working capital cycle has lengthened to nearly 1.5 times for his company. “When inventories are piling up, companies will obviously reduce capacity and defer expansion, which affects contractors.”

About 60% of Shriram’s Rs 2,000 crore portfolio is in the private sector.

Brijesh Koshal, head of investment banking at Daiwa Securities SMBC, said some companies have seen their working capital cycle even double or even treble in the last six months.

Ironically, this is happening even as interest rates are on their way down.

Infrastructure and construction firms say working capital loans are now available at 10-11% as opposed to 13-15% a month back. Rates are expected to go down further, providing a much-needed breather.

Companies with a bias towards government contracts appear relatively better off than those with a large share of private projects.

IVRCL Infrastructure & Projects, for example, has not seen any change in its working capital cycle. E Sudhir Reddy, chairman and managing director (CMD) of the company said “We have not seen any problem in payments as we have no private contracts.”

Ramnath of Shriram EPC, though, says there have been instances of delays in payment by even public sector units.

H S Bharana, CMD of infrastructure and realty player Era Group, agreed with Reddy that there are issues with payments on time by private clients. Era Infra Engineering, a group company with 15% of its order book in the private sector, has seen the cycle increase from 90 to 120 days, while Patel Engineering has witnessed an expansion to 1.5 - 1.75 times.

Could the firms hope for a change in the situation anytime soon? Unlikely, what with the economic downturn looking set to extend well into next year.

“There could be a time lag, but the slowdown will finally catch up with everyone. In a year, infrastructure could be badly affected,” said Ramnath.

Bharana said the current gloom and doom makes it difficult to predict when things will look up again.