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Construction: Winners & losers of COVID

Even though the construction sector was badly impacted by the pandemic-led lockdown, the cement industry saw a quick recovery in Q2

Construction: Winners & losers of COVID

Like many other sectors, the construction sector also faced the brunt of the pandemic. The sector - comprising companies belonging to the cement, infrastructure and realty spaces - came to a standstill, owing to the nationwide lockdown and related restrictions. Although restrictions were lifted gradually, the sector grappled with its own set of challenges, with labour shortage being the major one. Large-scale labour migration from cities, coupled with a complete disruption to the supply chain of raw materials, took a toll on the sector.

Of all the sub-sectors, real estate was the worst hit. Most of the real-estate companies suffered the revenue loss of around 80-90 per cent in the first quarter of FY21 as compared to the year-ago period. None of the companies from this sub-sector were able to post positive growth even till the end of the second quarter, making it one of the least-recovered sectors. For infrastructure companies, the story was quite similar.

However, companies engaged in the manufacturing of cement have seen a great uptick in revenues during the second quarter of the current financial year. The sharp recovery in the cement sector was driven by the rural segment, followed by the relaxation of lockdown norms, growing demand in tier 2 cities as well as in the infra segment, and a mild recovery in the urban segment. Higher revenues and profits came on the back of increasing cement prices in the last six months. The growing demand for cement is closely associated with overall economic growth, particularly growing demand for housing and infrastructure. Given this, the increasing demand for affordable housing and the government's increased focus on infrastructure may act as positives for the construction sector as a whole.

Winners

JK Cement: Of all cement companies, JK Cement delivered the best revenue growth in Q2FY21, at 24 per cent as compared to the last year. This was despite the fact that it was operating at a capacity of 70 per cent. This was possible owing to the increase in cement prices and lower input costs of its key raw materials, such as pet coke. During the current financial year, the company has added 4.2 million metric tonne (MMT) of capacity and plans to add 3.4-4.0 MMT till the end of the next financial year.

Ashok Buildcon: This infra company had an order book of Rs 9,300 crore as of the quarter ended September 2020, in which it reported year-on-year growth of 14.6 per cent at a time when most infra companies had been on a path of de-growth. This was due to the availability of labour in the second quarter and the reversal of some contingency provisions for some projects. The government's thrust on infra investments is likely to push up the company's order book, which already comprises 46 per cent highway contracts, 35 per cent road contracts, 10 per cent power and 8 per cent railway contracts.

Losers

Godrej Properties and Indiabulls Real Estate: Despite the growing demand for affordable housing, real-estate developers incurred huge losses in the second quarter as well, owing to declining property prices and lenders' reluctance to provide credit facilities to the real-estate sector. This resulted in tepid growth of new launches.