Indian Construction Industry, 2011
Credit Analysis & Research Limited, November 2011, Pages: 127
Poor execution to drag down the revenue growth
Infrastructure investment expected to double in the next Five Year Plan
Investment in the infrastructure sector plays a crucial role in the growth of the economy and in turn the construction industry. In the last few years, the rapid growth of the economy has put a tremendous pressure on the physical infrastructure of the country. In order to sustain the economic growth, the government has lined up huge investments across various infrastructure segments. The total investment planned in the infrastructure sector during the Twelfth Five Year Plan is estimated to double that in the Eleventh Five Year Plan.
Investment in the infrastructure as a percentage of GDP has increased from 4.5% in FY04 to 7.9% in FY11. The Planning Commission has estimated that, for the GDP to continue to grow at 9%, the proportion of investment in infrastructure as a percentage of GDP is required to increase from the targeted 8.4% in FY12 to 10.7 % by the terminal year of Twelfth Five Year Plan i.e. FY17.
Using the top-down approach, the investment in the infrastructure sector during the Twelfth Five Year Plan is estimated at a massive Rs.41,000 bn. Based on construction intensity of the various infrastructure projects and similar allocation among sectors during the Eleventh Five Year Plan, the indicative effective construction investement is estimated at a whopping Rs.20,000 bn during the Twelfth Five Year Plan.
Industrial sector –construction opportunity of more than Rs.4,200 bn
Apart from infrastructure projects, the construction industry also receives orders from different manufacturing industries to execute construction work for industrial plants and related civil construction. The construction industry had been benefiting from the rise in industrial production in the past few years. As on June 30, 2011, the total outstanding investment in the industrial sector stood at about Rs.35,000 bn. Omitting the investment which is already under implementation from the total outstanding investment, CARE Research estimates the effective construction investment of more than Rs.4,200 bn during the next 4-5 years period.
Eventhough, the construction opportunity from both infrastructure and industrial sectors looks immense; order inflow in the near term is likely to be affected due to slowdown in capex cycle and awarding of infrastructure projects by the government.
Delay in project execution to hamper the revenue growth
In the past few years, with the improvement in the macroeconomic conditions and the growing emphasis of the GoI on improving infrastructure in the country, construction companies have been benefited. This is evident from the bulging order backlog positions of the leading construction companies. The multiple of order backlog to sales has been in the range of 2.4 to 3.3 times over the past five years. In FY09, due to the overall economic slowdown and poor liquidity conditions, the multiple had declined to a level of 2.4 times. However, with the improvement in the macroeconomic scenario in FY10, awarding of infrastructure projects caught pace and the multiple increased to three times. At the end of the FY11, the multiple reached a level of 3.3 times which was mainly on account of the muted topline growth due to poor order execution. Eventhough, the multiple of aggregate order backlog to sales at 3.3 times shows the decent revenue visibility for the construction companies, execution of the order backlog remains a key challenge due to various issues.
On account of this, almost 30-35% of projects in the existing aggregate order backlog are slow moving or stuck which can hamper the project execution to a great extent and drag down the revenue growth. Taking this into consideration, CARE Research has estimated that construction companies are expected to register revenue growth at a CAGR of 29% during the period FY 11-14, much below the potential revenue growth.
No respite on the margins front for construction companies …
The PBIDT margin of construction companies largely depends on the order backlog mix, movement in prices of key raw materials and the extent of escalation clauses built into the contracts. Despite of the favourable order backlog position, the PBIDT margin of construction companies was under pressure in FY11 due to sluggish revenue growth led by the delay in order execution and fairly high prices of key input materials like steel, cement, bitumen, copper etc.
In FY 12, prices of key input commodities are expected to remain firm. With intensified competition and delay in execution of order backlog, profitability of the construction industry will remain under pressure. The PBIDT margin of construction companies is expected to remain in the range of 15-16% in FY 12. Moreover, increased borrowings and high interest rates will continue to hit the bottom line of the construction industry.
In the past couple of years, the construction industry has been benefited by the recovery in the macro economic conditions after the global turmoil. The order backlog to sales multiple has increased to a comfortable level of 3.3 times as at the end of the FY11. However, the construction industry is facing a huge challenge of delay in the execution of projects across all the sectors. Since the last fiscal, the momentum of order inflow to construction companies has slowed-down on account of the issues related to land acquisition, environmental clearances, unveiling various scams and political instability in the country.
Under this scenario, many questions arise like, What will be the opportunity for the construction industry from the planned investement in the infrastructure sector during the Twelfth Five Year Plan? What is the construction opportunity from various sub-segments within the infrastructure sector? To what extent the industrial sector has recuperated from slowdown and how much will it contribute to the growth of the construction industry? What are the key challenges and issues for the industry? Will the construction industry be able to maintain its profitability margins? CARE Research has attempted to address many such queries using the most pragmatic approach.
With its established network of primary and secondary sources, CARE Research has presented an exhaustive coverage on the industry with key focus on the infrastructure sector. The status of various sub-sectors under the gamut of infrastructure is discussed in detail by furnishing key data points.
The report provides vital information on the cost structure of the industry, covering trends in the key raw material industries like cement and steel. The company profile in the report covers key financial parameters, trends of sector-wise order backlog, key projects under execution and so on. In addition, quarterly updates, included with the subscription to this report, will help the user keep abreast of the latest developments in the industry.
Executive Summary
Outlook
Section I
Overview
Construction industry and GDP
Status of the Industrial sector
Order backlog position and order inflow
Infrastructure Sector
Overview & Eleventh Five Year Plan
Overview and investment across various sub-sectors …
- Road
- Power
- Port
- Airport
- Railways
- Telecom
- Urban Infrastructure
- Irrigation
- Cost Structure & Margins
Overall Cost Structure
Raw material & Subcontracting cost
Cement & Steel scenario
Aggregate income & profit margins
Company Profile
Hindustan Construction Co. Ltd.
Nagarjuna Construction Co. Ltd.
Larsen & Toubro Ltd.
IVRCL
Punj Lloyd Ltd.
Simplex Infra.
Section II
Construction Component
Industry Characteristics
Introduction to Contracts
SWOT Analysis & Porter's Model
- Hindustan Construction Co. Ltd.
- Nagarjuna Construction Co. Ltd.
- Larsen & Toubro Ltd.
- IVRCL
- Punj Lloyd Ltd.
- Simplex Infra.
Product Samples
A sample for this product is available. Please Login/Register to download this sample.
Customers who bought this item also bought
All rights reserved. © Copyright 2013 Research and Markets WWW5
Terms and Conditions Privacy Policy Publishers Employment Opportunities Site Map Link to us Webmaster Affiliate Network
