Global Business

Project II

Economic Analysis of

Construction Industry in

India

Submitted to: Submitted by:

Prof. Narender P. Venkata Sai Charan

Nandigam Vivek

Aishwarya Rai

Introduction India is the second fastest growing industry in the world and construction contributed a

huge amount in Indian service sector. The size of the construction industry in India is

about 2.1 trillion (2008). Indias construction industry has grown at a Compounded

Annual Growth Rate (CAGR) of 14.1% over the last four years on the back of massive

infrastructure investment and rapid rise in housing demand.

Investments in construction have positive domino effect on supplier industries thereby

contributing immensely to economic development. The construction sector has strong

linkages with various industries such as cements, steel, chemical, paints, tiles, fixtures

and fittings. While in the short term it serves as a demand booster, in the long term it

contributes towards boosting the infrastructure capacity.

The growth of Indias construction industry due to the delay in completion of

infrastructure projects has gradually dipped from about 30 per cent in 2007 to over

20 per cent in 2010 and to the current level of about 12 per cent. Market size of

Indias construction industry might not even reach Rs 30,000 crore mark by 2015

from the current level of about Rs 21,000 crore as the labour intensive sector has

been constantly grappling with the shortage of workforce.

Objectives:

1. To Study the trend of growth in the Indian Construction Industry.

2. To know the contribution made by the Construction Industry in the GDP of the

country.

3. To analyse the strengths, weaknesses, opportunities and threats.

4. To know the factors effecting the industry

5. To know the major players and regulators.

Major Players:

1.) Larsen & Toubro

2.) DLF

3.) Tata Projects

4.) Gammon India

5.) Hindustan Construction Company

6.) Sobha Developers Ltd

7.) Shapoorji Pallonji & Co

8.) Unitech

9.) Nagarjuna Construction Company

10.) Punj Lloyd

Regulators:

1.) National Building Construction Corporation

2.) Construction Industry Development Council

3.) Builders Association of India

4.) National Building Organization

5.) National Highway Authority of India

Economic Analysis The Construction Industry of India is an important indicator of the development as it

creates investment opportunities across various related sectors. The industry is

fragmented, with a handful of major companies involved in the construction activities

across all segments; medium sized companies specializing in niche activities; and small

and medium contractors who work on the subcontractor basis and carry out the work in the

field. The sector is labour-intensive and, including indirect jobs, provides employment to

more than 35 million people.

History:

The period between the 1950s to the mid 60s witnessed the government playing an

active role in the development of these services and most construction activities during this

period were carried out by state owned enterprises and supported by government

departments. In the first five year plan, construction of civil works was allotted nearly 50%

of the total capital outlay.

The first professional consultancy company, National Industrial Development Corporation

(NIDC), was set up in the public sector in 1954. Subsequently, many architectural, design

engineering and construction companies were set up in the public sector [Indian Railways

Construction Limited (IRCON), National Buildings Construction Corporation (NBCC), Rail

India Transport and Engineering Services (RITES), Engineers India Limited (EIL), etc.)

and private sector (MN Dastur & Company, Hindustan Construction Company (HCC),

Ansals, etc.).

Present Scenario:

India is on the verge of witnessing a sustained growth in infrastructure build up. The

construction industry has been witness to a strong growth wave powered by large spends

on housing, road, ports, water supply, and rail transport and airport development. While

the construction sectors growth has fallen as compared to the pre-2008 period, it has

picked up in the recent past. Its share in the GDP has increased considerably as

compared to the last decade.

From the policy perspective, there has been a growing census that a private-public

partnership is required to remove difficulties concerning the development of infrastructure

in the country, Given that the resource constraints of the public sector will continue to limit

public investment in infrastructure, especially backward and rural areas. At the same time

reviewing the factors that constrain private industry would be necessary to encourage and

speed up the process.

The real estate industry comprising of construction and development of properties has

grown from family based entities with focus on single products and having one market

presence into corporate entities with multi-city presence having differentiated products.

The industry has witnessed considerable shift from traditional financing methods and

limited debt support to an era of structured finance, private equity and public offering.

The construction sector is a major employment driver, being the second largest employer

in the country, next only to agriculture. This is because of the chain of backward and

forward linkages that the sectors have with other sectors of the economy. About 250

ancillary industries such as cement, steel, brick, and timber and building material are

dependent on the construction industry. A unit increase in the expenditure in this sector

has a multiplier effect and the capacity to generate income as high as five times.

Key Points:

Supply The past few years have been a substantial increase

in the number of contractors and builders, especially

in the housing and road construction segment.

Demand Demand exceeds supply by a large margin. Demand

for quality infrastructure construction is largely

emanating from the housing transportation and urban

development segments.

Barriers to entry Low for road and housing construction. However high

working capital requirements can create growth

problems for companies with weak financial muscle.

Bargaining power of

suppliers

Low. Due to the rapid increase in number of

contractors and construction service providers,

margins have been stagnant despite strong growth in

volume.

Bargaining power of

customers

Low. The country still lacks adequate infrastructure

facilities and citizens have to pay for using public

services.

Competition Very high across segments like road construction,

housing and urban infrastructure development.

Relatively less in airport and port development.

Gross Domestic Product (GDP):

The construction industry has contributed an estimated Rs.5, 85,265 crore to the national

GDP in 2010-2011 (a share of around 8.18%). And in 2011-2012, the GDP has reduced by

0.08% and has come down to 8.10%.

Source: http://www.infrawindow.com/reports-statistics/construction-et-al-us-500-bn-in-the-fray_71/

Financial Year 12

The construction industry witnessed a slowdown in FY12, after the economy showed some

resilience in the preceding two years. With the overall GDP slowing down, the growth in

the construction industry dipped to 4.8% in FY12. In addition, the high levels of inflation led

the RBI to keep the interest rates high, thereby reducing investments. Project financing

also became difficult on the back of the increasing gestation periods of the projects,

thereby leading financial institutions to take a cautious approach towards funding projects

in the sector.

The 2011-12 budgets saw the government double the financing limit of financing

infrastructure projects to Rs 600 bn.

On an overall basis, companies from the real estate and construction sector faced issues

related to higher interest costs on the back of leveraged balance sheets. The Reserve

Bank of India kept the interest rates on the higher side due to concerns over the high

inflation levels. Towards the end of the year, a handful of companies announced plans to

improve the health of their balance sheets by selling off their stakes in the non-core

Source: http://www.infrawindow.com/reports-statistics/construction-et-al-us-500-bn-in-the-fray_71/

businesses and improving the cash collection cycles, launching and bidding for projects on

a selective basis, amongst others.

Employment in the Industry:

This industry is labour intensive and, including indirect jobs it provides employment to

more than 35 million people. The construction industry is a major employment driver. It is

the second largest employer in the country after agriculture.

Expected growth of wage and salary jobs in the construction industry was about 15%

through the year 2012. Employment in civil and heavy engineering construction is

projected to increase due to increase in highway, bridge and street construction.

It is estimated that about 70 % of the employees are employed in infrastructure segment

and remaining 30% in the real estate segment.

According to industry estimates, the industry is expected to generate additional

employment of 47 million, with the total number of persons employed in the sector

reaching 83 million persons by 2022.

Industry Analysis

Service Below are the statics related to the construction industry from past 13 years (1999-2012).

The statistics include two types of information, financial and stock market. The Financial

Information includes the following indicators:

1. Sales growth

2. Expenses growth

3. PBDIT growth

4. PAT growth

5. PBDIT margin

6. PAT margin

The Stock Market Information includes the following indicators:

1. Market capitalization

2. Price-to-earnings ratio

3. Total trading volumes

4. Index Returns

5. Volatility of daily returns (Market capital weighted)

6. Volatility of daily returns (Equally Weighted)

Financial Statistics:

1.) Sales Growth

2.) Expenses Growth

3.) PBDIT Growth

4.) PAT Growth

5.) PBDIT Margin

6.) PAT Margin

Stock Market Statistics:

1.) Market Capitalization

2.) Price-to-earnings ratio

3.) Total Trading Volumes

4.) Index Returns

5.) Volatility of Daily Returns (Market Cap Weighted)

6.) Volatility of Daily Returns (Equally Weighted)

SWOT Analysis

Strengths of Construction Industry:

1. Good structured national network facilitates the boom of construction industry.

2. Low cost well-educated and skilled labour force is now widely available across the

country.

3. Sufficient availability of raw material and natural resources in a country is supportive

for the industry.

4. Increase in construction of the multi building projects on the feasible locations in the

country.

Weaknesses of the Construction Industry:

1. Chances of Natural Disadvantages.

2. Distance between construction projects reduces business efficiency.

3. Training itself has become a challenge.

4. Changing skill requirements and an ageing workforce may bring out the skills gap.

5. Huge amount of money needed to be invested in this industry and inefficiency may

lead to high level of risk.

Opportunities for Construction Industry:

1. Continuous private sector housing boom will create more construction opportunities.

2. Public sector projects through public private partnerships will bring further

opportunities.

3. Massive increase in Indian urban population.

4. Financial supports like loan and insurance and growth in income of people is in

support of construction industry.

5. Historical cultural heritages like the TAJMAHAL encourage and provide a creative

platform for the industry.

6. Remote areas in the country are easily accessible and plenty of land is available in

the country.

Threats to Construction Industry:

1. Long term market instability and uncertainty may damage the opportunities and

prevent the expansion of training and development facilities.

2. Political and security conditions in India.

3. Natural abnormal casualties such as earthquake and floods are uncertain and can

prevent the construction boom.

4. Improve in long term career prospects is highly required to encourage staff retention

and new entrants.

PEST Analysis Political factors effecting Construction Industry:

1. Building Commencement Certificate

2. Floor Space Index (FSI)

3. Occupation Certificate

4. Coastal Recovery Zone

5. Transfer of Development Right

Economical factors effecting Construction Industry:

1. Fluctuations in Prices of inputs

2. Changes in demand

3. Future growth & Resale value

4. Stamp Duty & Registration

Social factors effecting Construction Industry:

1. Credibility of Company/firm

2. Perceived image of the property developed

3. Building facilities

Technical factors effecting Construction Industry:

1. Pre-structured Concrete Blocks

2. Mixture of cement and sand

3. Other equipments

Porters Five Force

Analysis

Intensity of Competitive rivalry:

1. Sustainable competitive advantage through innovation.

2. Level of advertising expense.

3. Powerful competitive strategy.

4. Flexibility through customization, volume and variety.

Threat of New Entrant:

1. The existence of barriers to entry.

2. Brand equity

3. Capital requirements

4. Customer loyalty to established brands

5. Industry profitability.

Threat of Substitutes:

1. Buyer Propensity to substitute

2. Ease of substitution

3. Quality depreciation

4. Substandard products

Bargaining power of Buyers:

1. Bargaining Leverage

2. Buyer information availability

3. Availability of existing substitute products

4. Buyer price sensitivity

Bargaining power of Suppliers:

1. Presence of substitute inputs

2. Strength of distribution channel

3. Degree of differentiation on inputs

4. Supplier competition.

Industry Rivalry

HIGH

Threat of Substitute

LOW

Bargaining power of Buyers

MODERATE-HIGH

Threat of New Entrant

MODERATE-

LOW

Bargaining power of Suppliers

MODERATE-LOW

Conclusion With the growing focus on infrastructure development, Indian Construction Industry has

witnessed rapid growth to become the second pillar in the national economy after

agriculture. Construction Industry is a booming industry and remains so with the

continuation of the development process especially in the developing countries. With the

process of development, the migration of people takes place from the rural to urban areas.

This phenomenon is most significantly observed in India.

However, the construction industry is yet to meet its full potential due to various inhibiting

factors like delays in statutory clearances, time and cost overruns, low productivity levels,

lack of skilled manpower etc.

To accelerate the pace of infrastructure projects in India, there is an imperative need for

timely implementation of infrastructure projects through strengthening contractors

capacities to efficiently plan and implement projects, cutting down on pre and post

instruction delays and enhancing project delivery through the concerted efforts of policy

makers, developers, contractors and service providers.

Thus, the Construction Industry is also on a rise in this country.

References 1.) www.economywatch.com

2.) www.ncclimited.com

3.) www.mapsofindia.com

4.) www.nsdcindia.com

5.) www.wikipedia.com

6.) www.equitymaster.com

7.) www.indiaitaly.com