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What is worrying the construction sector? - Views on News from Equitymaster
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What is worrying the construction sector?
Oct 16, 2008

The next few quarters are expected to bring in tough times for companies in the construction space. While on one side companies from this space have bulging order books, they are facing concerns in terms of executing the same in time and without cost overruns. Then there are concerns with respect to financing shortage, high cost of capital and chance of a prolonged slowdown.

Liquidity concerns
To execute orders, companies require capital. This financing for projects and working capital requirement is borrowed from banks. Considering the current scenario, this puts the companies from the sector in a dilemma for two reasons - cash availability and high borrowing costs.

While borrowing cash from banks has become a difficult task given the liquidity situation, higher interest costs on the same will bring down their profits and margins. It should be noted that all this is in addition to the usual sector risks such as volatile commodity prices, rising manpower costs and broader risks of execution.

Slowdown fears
In addition to the above, if an industrial and investment slowdown were to persist for a long time, companies would be facing problems in generating new orders. And this could lead to most of them under-cutting others in prices to get the contract. This will put additional burden on their margins.

In addition to this, there is no taking away from the risk of some order cancellations that might seriously impact business for these companies going forward. In short, construction companies need to brace themselves for some tough times ahead.

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