In the fields of architecture and civil engineering, construction is a process that consistsof the building or assembling of infrastructure. Far from being a single activity, large scaleconstruction is a feat of human multitasking. Normally, the job is managed by a projectmanager, and supervised by a construction manager, design engineer, constructionengineer or project architect.For the successful execution of a project, effective planning is essential. Involved with thedesign and execution of the infrastructure in question must consider the environmentalimpact of the job, the successful scheduling, budgeting, construction site safety,availability of building materials, logistics, inconvenience to the public causedby construction delays and bidding, etc.Construction activity is an integral part of a country’s infrastructure and industrialdevelopment. It includes hospitals, schools, townships, offices, houses and otherbuildings; urban infrastructure (including water supply, sewerage, drainage);highways, roads, ports, railways, airports; power systems; irrigation and agriculturesystems; telecommunications etc. Covering as it does such a wide spectrum,construction becomes the basic input for socio-economic development. Besides, theconstruction industry generates substantial employment and provides a growth impetusto other sectors through backward and forward linkages. It is, essential therefore, that,this vital activity is nurtured for the healthy growth of the economy
Some interesting facts about the industry• The share of construction sector in gross domestic product (GDP), which was 5.4% in1970-71, came down to 4.4% 1990-91. Subsequently it picked up and stood at 5.1% in1999-2000 and now stays at a staggering 8.1% for the year 2011-2012• Construction industry roughly employees 33million people, more than any other sectoraside from agriculture.• The industry contribution to GDP is down from 16 per cent in the boom period,between 2004-08. But it’s still pretty substantial and in absolute terms, the industry hasgrown. The sector is very fragmented. There are hundreds of mid-sized and smallunorganised players as well as a handful of really big players. The big ones (L&T, HCC,GMR) have become developers rather than remaining contractors.• For 2012, projects worth an estimated Rs 140 lakh crore are estimated to be in variousstages of the pipeline according to CMIE. The Twelfth Plan alone is supposed tocontribute Rs 41 lakh crore worth of infrastructure creation with about half coming fromthe private sector. Urban development, private sector projects, and so on, make up therest.
DEMAND IN CONSTRUCTION INDUSTRY Demand originates from different sub-sectors such as public housing, public-sector non-housing, owner-occupied housing and private-sector industrial andcommercial, rehabilitation, improvements, repair and maintenance .However, onlyhousing, industrial and infrastructure sectors largely contribute to the constructionoutput in Sri Lanka. It is therefore in this light that output in those sub sectors areanalyzed to review the trend of construction.• The demand of construction industry is depend on interest rates, the cost andavailability of finance, and government investment decisions.• Government policies will be the key deterministic factor in construction demand.•The cost of construction, land supply and available sources of finance, projectdelivery systems had a direct bearing on the demand in this sector.•The emergence of private property development companies made a considerableimpact on construction demand in this sector, particularly in urban areas wheredemand grew rapidly with the expansion of the urban population. As a result,condominium style apartments and pre-built luxury housing schemes were built inurban/suburban areas.
CHALLENGES FACED BY THE INDUSTRYThe construction sector in India currently faces a number of challenges. The ReserveBank of India (RBI) raised benchmark interest rates on multiple occasions sinceMarch 2010 which increased the overall cost of borrowing. In addition, the privatesector deferred its capital expenditure decisions on account of uncertain demandconditions and issues concerning land acquisition; approvals and clearances; fuelsecurity and pricing; counterparty credit risks and policy issues. In FY 11, new projectsannouncements by the government sector also slowed down due to delays indecision making; lack of stable leadership at key public sector undertakings (PSUs);corruption-related investigations and state elections.A key area of concern is the steady increase in the quantum of stalled projects to Rs.4.17 trillion in September 2011from Rs. 2.94 trillion in September 2010, representinga 42% increase on a y-o-y basis (15% on q-o-q basis). Consequently, the y-o-y revenuegrowth of construction companies in Q1/Q2 FY 12 has been the slowest as comparedto the past few years. The reduced pace of execution is also evidenced by thesignificantly lower y-o-y growth of 2.7% (at FY 05 prices) in construction GDP in H1 FY12 as compared to 7.2% y-o-y growth in H1 FY 11
ORDER BACKLOG OF COMPANIES IN SAMPLE SURVEYBased on the order books of 15 companies covered in the sample, most companies hadhealthy unexecuted order book levels as of September 30, 2011 with the ratio of(unexecuted) order book to last reported annual revenues ranging from 2.1x to5.0x and an average of 3.4x. The corresponding averages as of 30 June 2011 and 31 March2011 were at 3.34x and 3.35x; the relatively flat averages indicate sluggishness in neworder inflow and relatively slow execution
NEW PROJECTS ANNOUNCEMENTIn the government sector: New project announcements by the government sector registered an approximate 29% decline in FY 11 over FY 10 due to multiple factors including state elections; lack of stable leadership in some PSUs, corruption-related investigations etc.). Nevertheless, renewed thrust on infrastructure spending led to some improvement in the first two quarters of FY 12.
Private Sector(New Project announcements): New project announcements by the private sector registered a negative growth for the past two quarters on a year-on-year as well as quarter on quarter basis, with the steepest decline in Q2 FY 12 (-79% y-o-y/-73% q-o-q). The significant drop in new project announcements by the private sector was due to issues regarding land acquisition; securing approvals and clearances; fuel security and pricing; counter party credit risks, policy issues etc. Further, successive hikes in interest rates by the RBI have increased the overall cost of project
Some relevant information and statistics related to constructionindustryProjects awarded by NHAI(in Kilometers) Outstanding Bank Credits to Road Sector
Year-on-Year Growth in Key Financial Indicators for Companiesin SampleRevenue growth of companies selected in the sample
Construction Industry share in GDP for the past fewyears
The positive signs that would benefit construction industry in2012-2013: Company Larsen & Toubro Ltd. A,C Hindustan Construction Co. Ltd. A,B,C IVRCL Ltd. A,B,C IRB Infrastructure Developers Ltd. A,C Gammon India Ltd A,CImpact factors:A. The Limit for tax-free bonds in the infrastructure sector has been doubled to Rs 600 billion for 2012-2013 vis-à-vis Rs 300 billion in 2011-2012B. The access to viability gap funding for irrigation projects is expected to facilitate private sector participation in the sector.C. At the corporate level, there has been a reduction in the withholding tax on interest payments of external commercial borrowing (ECB) from 20% to 5% for certain infrastructure sectors.
• Research estimates the total investments in construction to nearly double overthe next five years ended 2015-2016, to Rs 18.4 trillion. The growth will largely bespurred by continuing government spending on infrastructure. Nearly 85 percentof the total investments in the construction sector is likely to be made ininfrastructure, specially the power, roads, and urban infrastructure sectors.•Construction investment in individual segment is expected to amount Rs 2.7trillion over the next five years , with the investment in gas and oil sector being theprincipal investment•The construction industry’s operating margin in expected to decline by 150-200basis points by 2013-2014 . The pressure on Industry’s operating margin isexpected to continue with the rising share of lower0margin segments like roads,Higher prices of inputs like steel and cement sustained pressure on contract pricing
Expected growth in the next few years 12 10 8 6 4 2 0 2012 2013 2014 2015The global recession has extended this business cycle to over 10 years now. The nextpeak is likely to occur only in 2014-15 when the growth would peak 11%, inching upfrom 8% in 2010-11. Fiscal 2011-12 would see construction industry grow 8.2%.Thus, the growth would once again bounce back and will be faster than the overallGDP growth
CONCLUSIONThe cash flows and debt coverage indicators of most companies in the constructionsector are under pressure on account of higher debt levels; moderation in revenuegrowth and suppressed profitability. Going forward, we believe that the companies witha favourable capital structure; moving order book; relatively low working capitalintensity and low commitments toward equity contribution in BOT projects would bebetter placed to manage the risks that characterise the current environment. Kanumuri Rajashekar(12020841076) Kumar Vaibhav (12020841079) Meghna Singh (12020841082) Shruti Rauniyar (12020841098) Advait Bhobe (12020841116)
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