Abstract
Construction industry expected to witness effective investment over Rs. 10,000
bn during the 11th five year plan.......
Construction is the second largest economic activity in the country next to
agriculture. With its backward and forward linkages, Construction industry has
generated employment for 33 mn people in the country. In FY 08, Construction
sector contributed about 8.5% to the country' s GDP. Over past 3 years,
construction as a percentage of GDP has increased from 8.0% in FY 06 to 8.5%
in FY 08. The multiplier factor between growth rates of construction and GDP
has been about 1.5X-1.6X.
Construction industry in India is highly fragmented. There are number of
unorganised players in the industry which work on the subcontracting basis.
Construction activity being labour intensive, construction companies have been
focusing on mechanisation over past few years. Consequently, growth in quantum
of labourers required has declined from 1.6% in FY 04 to 0.9% in FY 08. Mostly
all projects in Construction industry are working capital intensive.
Construction project can be materialised through number of small contracts
which mainly depend upon size of the project and diversified nature of
activities to be carried out in the project. As a result, subcontracting is a
common phenomenon in the construction industry. Some complex infrastructure
and industrial projects call for specific expertise which a single contractor
may be inept to execute. As a result, industry is witnessing rising joint
ventures which help contractors to share professional and technological
expertise.
Cost structure of the construction industry is dominated by raw material cost
and subcontracting cost. Raw material cost which is the major cost accounts
for 30-50% of the total cost and subcontracting cost accounts for about
20-40%. Cost structure of a particular construction company also depends on
its order mix. This is because construction projects from different sectors
require varied level of raw materials and subcontracting work. Major raw
materials consumed by construction industry mainly include cement and steel.
Almost all domestic cement consumption is attributed to the construction
industry.
Steel requirements of the construction industry prominently includes long
products like reinforcement bars/rods, structurals and galvasnized steel.
Consumption of steel by construction industry has grown at a CAGR of 16.1%
over past 5 years whereas cement consumption has registered a CAGR of 9.6%.
Unprecedented rise in prices of these two raw materials has a direct impact on
the cost of the project and in turn margins of construction companies.
Profitability also depends upon the diversity of the projects a company can
execute. Companies having strong presence in segments like power and
industrial segment which are complex to execute, tend to enjoy higher margins.
Construction industry to a great extent is dependent on the investments in
infrastructure, industrial and real estate sector. Planning Commission has
envisaged an outlay of about US$ 500 bn during 11th five year plan for
infrastructure development in the country. These investments in different sub
segments of infrastructure would be achieved through a combination of Public,
Public-Private-Partnerships. This total investment would ultimately translate
into an effective construction investment of about Rs. 10,000 bn in next 4-5
years. Similarly, during the same period, construction industry could also
witness order inflow above Rs. 1,500 bn on the back of investments planned by
various manufacturing sectors. Real Estate segment also, throws opportunity of
effective construction investment above Rs. 1,000 bn over next five years.
Reflection of the same can be seen in bulging order book position of
construction companies.
Strong multiple of order book to sales projects a decent revenue growth for
construction companies. But the actual growth would be dependent on government
infrastructure spending, scheduling of proposed expansion projects by
manufacturing sectors and macroeconomic factors which govern investments in
real estate sector. Going forward, construction companies will also have to
tackle key challenge of input cost pressure.
With rise in input cost for Cement and Steel industries, prices of these
commodities are expected to remain firm in the year FY 09. Alongwith this,
delay in awarding of projects by government can also hamper the revenue growth
and margins of construction companies.
For in-depth analysis and CARE' s view on the future of this sector, please
refer to the exhaustive Report on Indian Construction Industry, October 2008
by CARE Research.
| 
View Cart
