Construction industry traits

1. CONSTRUCTIONINDUSTRY

2. In the fields of architecture and civil engineering, construction is aprocess that consists
of the building or assembling of infrastructure. Farfrom being asingle activity, largescale
construction is afeat of human multitasking. Normally, the job is managed by aproject
manager, and supervised by aconstruction manager, design engineer, construction
engineer or project architect.
For the successful execution of aproject, effective planning is essential. Involved with the
design and execution of the infrastructure in question must consider the environmental
impact of the job, the successful scheduling, budgeting, construction site safety,
availability of building materials, logistics, inconvenience to thepublic caused
by construction delays and bidding, etc.
Construction activity is an integral part of acountry’s infrastructure and industrial
development. It includes hospitals, schools, townships, offices, housesand other
buildings; urban infrastructure (including water supply, sewerage, drainage);
highways, roads, ports, railways, airports; power systems; irrigation and agriculture
systems; telecommunications etc. Covering asit does suchawide spectrum,
construction becomes the basic input for socio-economic development. Besides,the
construction industry generates substantial employment and provides agrowth impetus
to other sectors through backward and forward linkages. It is, essential therefore, that,
this vital activity is nurtured for the healthy growth of the economy

3. Materia
l (%)
Equipment
(%)
Labo
r
(%)
Financ
e (%)
Enabling
Expens
es (%)
Admin
Expens
es (%)
Surplu
s (%)
Building 58-60 4.5 11-13 7-8 5.5-6.5 3.5-4.5 5-6
Roads 42-45 21-23 10-12 7-8 5.5-6.5 3.5-4.5 5-6
Bridges 46-48 16-18 11-13 7-8 5.5-6.5 3.5-4.5 5-6
Dams 42-46 21-23 10-12 7-8 5.5-6.5 3.5-4.5 5-6
Power 41-43 21-24 10-12 7-8 5.5-6.5 3.5-4.5 5-6
Railway 51-53 6-8 16-18 7-8 5.5-6.5 3.5-4.5 5-6
Mineral
Plant
41-44 20-22 12-14 7-8 5.5-6.5 3.5-4.5 5-6
Break-Up of Construction costs
Source:Construction industry development council

4. •The share of construction sector in gross domestic product (GDP), which was 5.4% in
1970-71, came down to 4.4% 1990-91. Subsequently it picked up and stood at 5.1% in
1999-2000 and now staysat astaggering 8.1%for the year2011-2012
•Construction industry roughly employees 33million people, more than any other sector
aside from agriculture.
•Theindustry contribution to GDPis down from 16 per cent in the boom period,
between 2004-08. But it’s still pretty substantial and in absolute terms, the industry has
grown. Thesector is very fragmented. There are hundreds of mid-sized and small
unorganised players aswell asahandful of really big players. Thebig ones (L&T,HCC,
GMR)have become developers rather than remaining contractors.
•For 2012, projects worth an estimated Rs140 lakh crore are estimated to be in various
stagesof the pipeline according to CMIE.TheTwelfth Plan alone is supposed to
contribute Rs41 lakh crore worth of infrastructure creation with about half comingfrom
the private sector. Urban development, private sector projects, and soon, makeup the
rest.
Some interesting facts about the industry

5. Demand originates from different sub-sectors suchaspublic housing, public-
sector non-housing, owner-occupied housing and private-sector industrial and
commercial, rehabilitation, improvements, repair and maintenance .However, only
housing, industrial and infrastructure sectors largely contribute to theconstruction
output in SriLanka.It is therefore in this light that output in those sub sectors are
analyzed to review the trend ofconstruction.
•Thedemand of construction industry is depend on interest rates, the costand
availability of finance, and government investmentdecisions.
•Government policies will be the keydeterministic factor in constructiondemand.
•Thecost of construction, land supply and available sources of finance, project
delivery systems had adirect bearing on the demand in thissector.
•Theemergence of private property development companies made aconsiderable
impact on construction demand in this sector, particularly in urban areas where
demand grew rapidly with the expansion of the urban population. Asaresult,
condominium style apartments and pre-built luxury housing schemeswere built in
urban/suburban areas.
DEMANDIN CONSTRUCTIONINDUSTRY

6. CHALLENGESFACEDBYTHEINDUSTRY
Theconstruction sector in India currently facesanumber of challenges. TheReserve
Bankof India (RBI)raised benchmark interest rates on multiple occasionssince
March 2010 which increased the overall cost of borrowing. In addition, the private
sector deferred its capital expenditure decisions on account of uncertain demand
conditions and issuesconcerning land acquisition; approvals and clearances; fuel
security and pricing; counterparty credit risks and policy issues.In FY11, new projects
announcements by the government sector also slowed down due to delays in
decision making; lack of stable leadership at keypublic sector undertakings (PSUs);
corruption-related investigations and state elections.
Akey 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, representing
a42%increase on ay-o-y basis (15%on q-o-q basis). Consequently, the y-o-y revenue
growth of construction companies in Q1/Q2 FY12 hasbeen the slowest ascompared
to the past few years. Thereduced pace of execution is also evidenced by the
significantly lower y-o-y growth of 2.7%(at FY05 prices) in construction GDPin H1FY
12 ascompared to 7.2%y-o-y growth in H1FY11

7. ORDERBACKLOGOFCOMPANIESIN SAMPLESURVEY
Basedon the order books of 15 companies covered in thesample, most companies had
healthy unexecuted order book levels asof September 30, 2011 with the ratio of
(unexecuted) order book to last reported annual revenues ranging from2.1x to
5.0x and an averageof 3.4x. Thecorresponding averagesasof 30 June2011 and 31 March
2011 were at 3.34x and 3.35x; the relatively flat averagesindicate sluggishnessin new
order inflow and relatively slowexecution

8. NEWPROJECTSANNOUNCEMENT
In the governmentsector:
New project announcements by the government sector registered an approximate29%
decline in FY11 over FY10 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 FY12.

9. Private Sector(New Project announcements):
New project announcements by the private sector registered anegative growth forthe
past two quarters on ayear-on-year aswell asquarter on quarter basis, with the
steepest decline in Q2FY12 (-79% y-o-y/-73% q-o-q).
Thesignificant drop in new project announcements by the private sector was due to
issuesregarding land acquisition; securing approvals and clearances; fuel security and
pricing; counter party credit risks, policy issuesetc. Further, successivehikes in interest
rates by the RBIhave increased the overall cost ofproject

10. Somerelevant information and statistics related toconstruction
industry
Projects awarded by NHAI(in Kilometers)
Outstanding BankCredits to RoadSector

11. Year-on-Year Growth in KeyFinancial Indicators for Companies
in Sample
Revenuegrowth of companies selected in thesample

12. Construction Industry sharein GDP for the pastfew
years

13. Thepositive signsthat would benefit construction industryin
2012-2013:
Company
Larsen& ToubroLtd. A,C
Hindustan Construction Co.Ltd. A,B,C
IVRCLLtd. A,B,C
IRBInfrastructure Developers Ltd. A,C
Gammon India Ltd A,C
Impact factors:
A. TheLimit for tax-free bonds in the infrastructure sector hasbeen doubled toRs
600 billion for 2012-2013 vis-à-vis Rs300 billion in2011-2012
B. Theaccessto viability gapfunding for irrigation projects is expected to facilitate
private sector participation in thesector.
C. At the corporate level, there hasbeen areduction in the withholding tax on
interest payments of external commercial borrowing (ECB)from 20%to 5%for
certain infrastructure sectors.

14. •Researchestimates the total investments in construction to nearly double over
the next five years ended 2015-2016, to Rs18.4 trillion. Thegrowth will largely be
spurred by continuing government spending on infrastructure. Nearly 85 percent
of the total investments in the construction sector is likely to be made in
infrastructure, specially the power, roads, and urban infrastructuresectors.
•Construction investment in individual segment is expected to amount Rs2.7
trillion over the next five years , with the investment in gasand oil sector being the
principal investment
•Theconstruction industry’s operating margin in expected to decline by 150-200
basis points by 2013-2014 . Thepressure on Industry’s operating margin is
expected to continue with the rising share of lower0margin segments like roads,
Higher prices of inputs like steel and cement sustained pressure on contractpricing

15. 12
10
8
6
4
2
0
2012 2013 2014 2015
The global recession has extended this business cycle to over 10 years now. The next
peak is likely to occur only in 2014-15 when the growth would peak 11%, inching up
from 8%in 2010-11. Fiscal2011-12 would seeconstruction industry grow 8.2%.
Thus,the growth would once again bounce back and will be faster than theoverall
GDPgrowth
Expected growth in thenext few years

16. C
ONCLUSION
Thecashflows and debt coverage indicators of most companies in the construction
sector are under pressure on account of higher debt levels; moderation in revenue
growth and suppressed profitability. Going forward, we believe that the companieswith
afavourable capital structure; moving order book; relatively low working capital
intensity and low commitments toward equity contribution in BOTprojects would be
better placed to managethe risks that characterise the current environment.
KanumuriRajashekar(12020841076)
KumarVaibhav (12020841079)
Meghna Singh (12020841082)
ShrutiRauniyar (12020841098)
Advait Bhobe (12020841116)