Indian Construction Industry

Synopsis

Construction Industry – Building the order book on the foundation of infrastructure…

With the economic slowdown, the order inflow to construction companies had slightly slowed
down in FY09. Profitability margins of the construction industry were under pressure as the
prices of key raw materials like cement & steel were hovering at peak levels. To bring back
the economic growth on track, the government had announced a few stimulus packages. The
emphasis was given mainly to ease the liquidity and liberalize the lending policies to provide
funding to the long-term infrastructure projects. Post elections in early FY10, the government
has been focusing on awarding projects under different infrastructure segments. Moreover,
with the recovery in the macro-economic conditions and the industrial sector, the order inflow
to construction companies has gathered momentum in FY10.
The Government of India (GoI) has set an ambitious target of increasing the proportion of the
infrastructure investment to about 9% of Gross Domestic Product (GDP) by the terminal year
of the Eleventh Five Year Plan. For the GDP to continue to grow at 9%, this proportion is
targeted to increase further to 10.3% by the end of the Twelfth Five Year Plan. This will bring
about a massive investment to the tune of more than Rs. 40,000 bn in the infrastructure sector.
The power and road sector are estimated to account for the major chunk of the investment
planned in the infrastructure. In order to achieve the mammoth investment target, the GoI is
seeking the support of the private sector through Public Private Partnerships (PPP). It is
estimated that almost 60% of the power generation capacity addition in the Twelfth Five Year
Plan will be contributed by the private sector. To encourage the participation of private
companies in the road sector, the Ministry of Road has taken various initiatives like relaxing
the land acquisition norms, providing cost overruns and increasing the concession period.
The construction industry is expected to witness strong momentum in the order inflow as the
awarding of projects in infrastructure and industrial space progresses. From the power
generation segment alone, construction orders worth almost Rs. 1,370 bn are expected to flow
to the construction sector in the next 3-4 years. Under the road sector, more than 36,000 kms
of roadways are yet to be developed. This is likely to generate potential orders of worth about
Rs. 1,800 bn. Furthermore, the outstanding investment in the industrial sector could
 Indian Construction Industry

potentially translate into an effective construction investment of about Rs.2,900 bn during the
next 4-5 years period.
The current multiple of order backlog to sales for the construction companies had improved
to a comfortable level of 3 times as at the end of the FY10. This shows the strong revenue
visibility for the construction companies over the period of next three years. With the rise in
the proportion of high margin projects like power and water in the order book, the
profitability margin of the industry has witnessed a rising trend. Almost 43% of the current
outstanding order backlog consists of high margin projects, which will enable the
construction companies to maintain their margins in FY 11.

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