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Index

1. Introduction 02

2. Basic Framework 03

3. Market Dynamics 05

4. PEST Analysis 15

5. Competitive Landscape 18

6. Industry Outlook 26

7. Bibliography 27
1. INTRODUCTION.

The Indian construction industry recorded a consistent double-digit year-on-


year growth (12%) during 2000-2005, and is expected to grow at 25-30% during
2005-2010. The key drivers of this growth are government investment in
infrastructure creation and real estate demand in the residential and industrial
sectors.

The construction industry is the second largest industry of the country after
agriculture. Construction activity is an integral part of a country’s infrastructure and
industrial development. It includes hospitals, schools, townships, offices, houses and
other buildings; urban infrastructure (including water supply, sewerage, drainage);
highways, roads, ports, railways, airports; power systems; irrigation and agriculture
systems; telecommunications etc. Covering as it does such a wide spectrum,
construction becomes the basic input for socio-economic development. The
construction industry is the infrastructure of the infrastructure industry. Besides, the
construction industry generates substantial employment and provides a growth
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.

With the present emphasis on creating physical infrastructure, massive


investment is planned during the Tenth Plan. The construction industry would play a
crucial role in this regard and has to gear itself to meet the challenges. In order to
meet the intended investment targets in time, the current capacity of the domestic
construction industry would need considerable strengthening.

The construction sector has major linkages with the building material
industry since construction material accounts for sizeable share of the construction
costs These include cement, steel, bricks/tiles, sand/aggregates, fixtures/fittings,
paints and chemicals, construction equipment, petro-products, timber, mineral
products, aluminum, glass and plastics.

The construction sector is one of the largest employers in the country. In


1999-2000, it employed 17.62 million workers, a rise of 6 million over 1993-94. The
sector also recorded the highest growth rate in generation of jobs in the last two
decades, doubling its share in total employment.

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2. BASIC FRAMEWORK

Indian Construction industry is currently worth $ 70 billion and would rise to


$ 120 billion by 2010.The construction industry is divided into three major segments.

2.1 Industry Definition

The construction industry comprises establishments that are primarily


engaged in the construction of buildings or engineering projects (e.g., highways and
utility systems). This may include new work, additions, alterations, or maintenance
and repairs. The construction industry is divided into three major sectors.

• The first is the construction of buildings (both residential and


nonresidential).

• The second involves heavy and civil engineering construction such as utility
systems , land subdivision, and highways, streets, and bridges.

Firms in these first two sectors are primarily engaged in contracts that
include responsibility for all aspects of individual projects and are commonly know as
general contractors.

• The third major sector of the construction industry includes establishments


in the specialty trades, which are primarily engaged in activities to produce a
specific component (e.g. masonry, painting, and electrical work) of a project.

Specialty trade contractors usually do the work of only one trade, such as
painting, carpentry, or electrical work, or of two or more closely related trades, such
as plumbing and heating. Beyond fitting their work to that of the other trades,
specialty trade contractors have no responsibility for the structure as a whole. They
obtain orders for their work from general contractors, architects, or property
owners. Repair work is almost always done on direct order from owners, occupants,
architects, or rental agents. Houses, apartments, factories, offices, schools, roads,
and bridges are only some of the products of the construction industry.

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2.2 The major construction industry sectors can also be classified as follows:

Ø Buildings & Factories


• Institutional & Commercial Buildings
• System and mass Housing & Industrial Structures for factories
Ø Transportation Infrastructure
• Ports & Harbours and Special Projects
• Roads, Airports & Runways
• Bridges
Ø Hydel & Nuclear Power and Foundation Engineering
• Hydropower and Irrigation Projects
• Nuclear Power, Space & Defence Projects
Ø Industrial Projects & Utilities
• Thermal & Non-conventional Power
• Hydrocarbon Construction & Pipelines
• Minerals & Metal
• Bulk Material Handling
• Water Supply and Effluent Treatment
Ø Electrical Instrumentation and Communication
• Industrial Electrification & Switchyards
• Telecommunication
• Instrumentation
Ø Development Projects
• Roads
• Bridges
• Airports
• IT Parks
• Water Supply Projects
• Others

2.3 Legal Framework

A construction project must fit into the legal framework governing the
property. These include governmental regulations on the use of property, and
obligations that are created in the process of construction.

Building and Other Construction Workers (Regulation of Employment and


Conditions of Service) Act, 1996 regulate the employment and conditions of service
of building and other construction workers and to provide for their safety, health

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and welfare measures and for other matters connected therewith or incidental
thereto.

The Building & Other Construction Workers’ Welfare Cess Act of 1996
provides for the levy and collection of a cess on the cost of construction incurred by
employers with a view to augment the resources of the Building & Other
Construction Workers’ Welfare Boards constituted under the Building & Other
Construction Workers (Regulation of Employment and Conditions of Service) Act,
1996. It extends to the whole of India and came into force on the 3rd day of
November, 1995.

Many construction projects are subject to disputes. In fact according to CIDC


estimates, the capital blocked in disputes is in excess of 540 billion. Till enactment of
Arbitration & conciliation act 1996, the process of dispute resolution was totally ad
hoc. Act provided the institutional arbitration helps to provide effective framework
for dispute resolution. The other laws and acts such as Contract act, transfer of
property act etc. which are applicable to industries need to be followed.

A construction project is a complex net of contracts and other legal


obligations, each of which must be carefully considered. A contract is the exchange
of a set of obligations between two or more parties, but it is not so simple a matter
as trying to get the other side to agree to as much as possible in exchange for as little
as possible. CIDC data has shown that about 500 billion worth of contracts are
subject to disputes.

2.4 National Building Code

A building code is a document containing standardized requirement for the


design & construction of most types of building. Codes regulate building construction
& building use in order to protect the health, safety & welfare of the occupant.
Codes express all aspects of construction including structural integrity, fire
resistance, safe exists, lighting, electrical, energy conservation, plumbing, sanitary
facilities, ventilation, seismic design & correct use of construction materials.

The National Building Code is a single document in which, like a network, the
information contained in various Indian Standards is woven into a pattern of
continuity and cogency with the interdependent requirement of sections carefully
analyzed and fitted in to make the whole document a cogent continuous volume. A
continuous thread of preplanning is woven which, in itself, contributes considerably
to the economies in construction particularly in building and plumbing services.

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3. MARKET DYNAMICS

3.1 MARKET OVERVIEW

The Indian construction industry recorded a consistent double-digit year-on-


year growth of 12% during 2000-2005, and is expected to grow at 25-30% during
2005-2010.The key drivers of this growth are government investment in
infrastructure creation and real estate demand in the residential and industrial
sectors.

Presently, the annual expenditure budget of India is Rs.438, 795 Crores


against the backdrop of the total Gross National Product (GNP) of the country of
about Rs.2200,000 Crores or more (www.indiabudget.nic.in, 2004). Over the years,
more than half of the expenditure budget is spent on civil engineering works.
Annexure-I shows the investments made in the industry over the past years. The
construction industry sets in motion the process of economical growth in the
country; investment in this sector contributes 6.5% of Gross Domestic Product (GDP)
growth. Every Re.1 investment in the construction industry causes an Rs.0.80
increment in GDP as against Rs.0.20 and Rs.0.14 in the fields of agriculture and
manufacturing industry, respectively.

Statistics over the period have shown that compared to other sectors, this
sector of economic activity generally creates 4.7 times increase in incomes and 7.76
times increase in employment generation potentiality. Sustained efforts by the
Indian construction industry and the Planning Commission have led to assigning the
industry status to construction today. This means formal planning and above board
financial planning will be the obvious destination of the construction sector in the
country, with over 3.1 Crore persons employed in it.

3.2 TREND ANALYSIS

Ø Public-private partnerships

Public-private partnerships have emerged as one of the significant modes of


infrastructural financing. The Government of India has taken several initiatives like
viability gap funding, Public Private Partnership Appraisal Committee (PPPAC) and
India Infrastructure Finance Company Ltd. (IIFCL) to promote PPPs. Viability Gap
Funding is available up to twenty per cent of the total project cost, normally in the
form of a capital grant at the stage of project construction.

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Under the VGF scheme, twenty three projects with project cost of Rs.
11,114.7 crore have been given in principle/final approval involving an estimated
Viability Gap Funding of Rs. 2,690.3 crore. IIFCL has so far approved 64 credit
proposals involving assistance from IIFCL amounting to Rs.14,966 crore. For
providing financial support for quality project development activities to the States
and the Central Ministries, a corpus fund titled India Infrastructure Project
Development Fund (IIPDF), with initial outlay of Rs. 100 crore is being set up.

Ø Increasing Demand for Housing

Housing sector is poised to witness unprecedented demands. As the


economy improves, a large segment of the population would arise above the poverty
line and the third need popularly articulated of “Makan” in the famous slogan of
“Roti, Kapda aur Makan” (Food, clothing & shelter) would become stronger

The main determinants of the demand for housing are demographic.


However other factors like income, price of housing, cost and availability of credit,
consumer preferences, investor preferences, price of substitutes and price of
compliments all play a role.

The core demographic variables are population size and population growth:
the more people in the economy, the greater the demand for housing. it is
households that demand housing services: typically one household per house. The
size and demographic composition of households is variable and not entirely
exogenous.

Figure 3.1 housing demand factors

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From an external point of view, housing is being considered more and more
as an asset by international investors as well as by Indians residing abroad. This is
attracting a large amount of international investments and expatriate funds into the
housing sector. From an internal point of view, the economic growth is leading to
rapid urbanization and creation of a new middle class. This along with changing
social norms leading to nuclear families and the decreasing age of individuals
purchasing houses are fuelling demand for housing.

According to a study conducted by ICICI Securities, the size of an average


urban household decreased from 6.06 in 2001 to 5.5 at present against the average
household size in Europe varying from 2.3 to 2.8. Rising income, greater number of
income generators per household, especially working women and the younger
generation, and changing mindset are the primary reasons for reduction in the
household size.

It is expected that the household size will continue to decline in the next 10
years. As per industry estimates, average age of a home buyer has decreased from
42 years to 31 years. The younger generation is creating further demand for
residential units and the trend should continue as the income generation capability
of the Indian youth grows. The diagram below is a summarized illustration of the key
factors that are driving housing demand in India.

Ø Widening Demand–Supply Gap

The demand for the housing, commercial buildings is very high; but the
supply is limited. The urban population is increasing very rapidly. Due to various key
drivers of growth listed above causing the market demand to increase more and
more. It has been analyzed that residential prices have increased by about 15- 20%
on average in the last one year. There has been strong growth in demand supported
by rising disposable incomes, low interest rates, and fiscal incentives on both interest
and principal payments and increasing urbanization. In 1995 EMI (Estimated Monthly
Installments) as a part of salary was 54% as compared to 28 % in 2005. Also, as per
industry estimates, the average age of a house buyer has fallen from 42 to 31yrs.

Ø India’s booming infrastructure spend

Order inflows for construction companies continue to remain robust which is


indication of India’s booming infrastructure spend. As of June 2007, order book of
top eight construction companies was at least twice their annual revenues of 2006-
07. The infrastructure sectors are needed to built in India apart from the some of
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metro cities such as roads, airports, power plants. (India Has to build new power
plants to meet its future energy demand which is growing phenomenally)
An increase in port capacity from 334 MT to 470 MT by the end of the Tenth
Five Year Plan envisaged. Investments of around Rs 163 billion planned. Privatization
and upgradation of four metro airports planned. A number of airports, including
international airports at Hyderabad and Bangalore, to be built. Investment of over Rs
164 billion proposed.

Another area where the demand far outstrips supply is the urban
infrastructure amenities. The government is stressing on large capacity addition in
various segments of the sector. Urban transportation, water supply and housing are
some of the key areas. Other than a huge plan outlay, private participation is also
considerable. Special Economic Zone development is also an area to look out for.

Investments upwards of USD55 billion planned. Plans are on to build or


widen 14,162 kms and 105,000 of roads by the central sector (NHAI) and state sector
respectively. Opportunities in O&M of road projects also substantial.

Ø Industry Moving Towards Consolidation

Construction industry is moving towords a stage where the major players are
well defined. The playes like L&T,Jaypee etc are big companies undertake the major
engineering and construction projects like Dams, Tunnels, Power plants, Heavy
construction etc.This creates the huge demand for limited players.

The prices of real estate in the urban india is very high, which will require
companies to have more capital so as to acquire new lands and develop them. The
big players can survive and will be few in numbers with well defined teritories of
operation. The demand in metro cities is perfectly inelastic,with certain well defined
competition will create huge boom for the operating companies.

The small or local players who are in huge nos. are restricted to local
geography only but it will not easy to expand to other teritories. The industry is now
moving towords consolidation. The increase urbanisation will leads the local players
also a great opportunity to serve the huge demands of people.

Ø 100 % FDI in construction industry through automatic route.

The Government has allowed 100 per cent foreign direct investment in the
construction industry through the automatic route. Conditions restricting FDI to a
minimum area of 100 acres and 2,000 dwelling units are relaxed to 25 acres and
50,000 square meters for construction development projects.

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The decision ensured that FDI was "construction-centric" rather than “land-
centric" in the past. Foreign investors could now come in any area but would have to
construct at least 50,000 square meters within a timeframe so that they did not hold
land for speculative purpose.

Ø Project Export

The Indian construction industry has been very active in the overseas
markets, especially in the Gulf during the 1970s and 1980s when Indian companies
ventured there to meet the demand of construction activities generated by the oil
boom. Between 1975 and 1980, Indian companies handled construction work
amounting to nearly US $5 billion. But this trend did not last and by the late 1980s,
the volume of contracts secured fell sharply. In 1996-97, the value of project export
was Rs. 338 crore (US$ 95.2 million), which increased to Rs. 1,500 crore (US$ 346.2
million) in 1999-2000.

3.3 KEY DRIVERS

Ø Booming Indian economy

Over past few years, the Indian economy continued on its robust growth path
with the overall growth in real gross domestic product at factor cost estimated at 9.4
per cent (in 2006-07). India was the second highest contributor to world growth in
2006. Sustained high growth over the last four years has made India the third largest
economy after USA and China with its share in world GDP rising from 5.5 per cent in
2002 to 6.4 per cent in 2006.

The strong growth prospects of the Indian economy, high returns on equity
and higher interest rates coupled with rise in global private capital flows, have
resulted in hue growth of construction industry.

Ø Growing housing and commercial space requirements

The housing needs of urban population are increasing day by day.


Urbanization of India is important factor in this. Many industries are expanding to
many cities beyond metros like Mumbai, Delhi etc. Many foreign industries are
setting their plants in not so developed parts of India.

The urbanization of population rise of incomes levels, middle income groups


has shown huge interest in Commercial malls, multiplexes, organized retail which

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has given a boost to construction industry. The mall space construction has shown
substantial which can be seen from the graph.

Graph 1: Mall size Million square feet v/s years


200

144

87
54

16 22
2 7

2002 2003 2004 2005 2006 2007 2008 2009

Ø Govt. thrust on infrastructure, Government projects, initiatives etc.

Sustenance of growth is fully contingent on the creation of supportive


infrastructure. Hence the Government has been employing innovative options to
develop infrastructure. Airport modernization projects, Construction of roads
bridges water supply projects and many other government initiatives provided boost
for construction industry.

Ø Rising Household Income

India’s household income is rising sharply. The new evolution of middle


income groups has supported the boom of construction industry. As a result of rising
income and swelling middle class, India’s per capita income has doubled over the
past 20 years. With population growth of about 1.6% per annum and Gross
Domestic Product (GDP), growth of 9% per annum, the per capita income is expected
to quadruple by the year 2020.

The average real income of urban India and rural India is likely to grow by
5.7% and 3.6% respectively by 2025. Moreover, India’s middle class is expected to
expand by more than 10 times from its current size of 50 million to 583 million
people in next 18 years.

Therefore, all these estimates work out to make a strong case for higher
home loan GDP ratio so that India and its population is able to keep a pace for
meeting the demand for housing units.

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Ø Booming IT&ITES Sector

Almost 30-40 per cent of the land acquirers have been IT companies. Not
only are new companies looking at setting up shop, but the existing companies such
as IBM and Microsoft are also expanding.

The notable transactions in Bangalore include companies such as Microsoft


and IBM committing to lease approximately 1,00,000 sq. ft. and 2,00,000 sq. ft.
space respectively. UL India has leased approximately 20,000 sq. ft.; Desmet
Chemford has leased around 16,000 sq. ft. and Oracle around 10,000 sq. ft. of space.

The IT corridor along the Sarjapur Ring Road is also buzzing with activity, with
companies such as Intel purchasing 43 acres of land and Hughes Software signing for
a 1,10,000 sq. ft. built-to-suit facility, with an option to expand.

The report said that Gurgaon still remained a preferred destination for
corporates that wanted space in Delhi. Some prominent transactions included the
lease of approximately 51,000 sq. ft. by Hewlett-Packard in the Global Business Park,
36,000 sq. ft. by Convergys in Orchid Square, 1,34,000 sq. ft. by Hewitt Associates in
DLF Center Court and 8,500 sq. ft. by Louis Berger.

The preference of IT & ITES companies for suburbs, due to availability of


better quality options at cheaper prices has led to an increase in demand for
residential properties in these areas. Thereafter, the emergence of good quality
condominiums with additional amenities has also fuelled the demand for residential
properties. However, despite the increasing demand in these areas, the prices will
remain unaffected in the medium term, owing to the excess supply of stock.

Ø Retail sector facilitating real estate growth

Apart from the IT and ITES industry influencing the Indian real estate sector,
India is also getting into the knowledge based manufacturing industry on a large
scale. Retail, one of India's largest industries, has presently emerged as one of the
most dynamic and fast paced industries of our times with several players entering
the market.

The contemporary retail sector in India which is reflected in sprawling


shopping centers and multiplex- malls is also contributing to large scale investments
in the real estate sector with major national and global players investing in
developing the infrastructure and construction of the retailing business. Over 500
shopping arcades are under construction phase and will be operational by 2008. If

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industry experts are to be believed, the prospects of both the sectors are mutually
dependent on each other.

Another emerging trend is investment in the hospitality or hotel industry. The


exceptional boom in inbound tourism and the IT sector has also led to an
unprecedented shortage of rooms, with hotels all over the country witnessing their
highest-ever occupancy rates.

Ø Changing Age Profile

As of 2004, about 53% of the population in the country is less than 25 years
of age. This compares favorably with China where the comparable number is 42%.
According to Asian Demographics Report, the 20-54 years age bracket is growing
faster than the rest of the population and will represent more than 50 % of the
population in 2013.

Ø Lucrative Investment Alternatives

The field of Indian real estate has proved so lucrative that most of the Indian
as well as foreign companies namely: Global–RMZ, Godrej Properties, Emami, ETA
Star, GE Commercial Finance, JM Financials, India Bulls Real Puravankar, Reliance
Industries Ltd (in Hotel business), Ambuja Realty, Liberty International (a British
property group), DCM Shriram etc., etc., have also jumped into this arena as the
results of investment in Indian real estate extremely overwhelming which showed fly
by night fast multiplication of capital. Buy property in India is also suitable for
investors due to emerging new renting system. After buying a house, one gets a well
paying renter. A new, modern concept and a new thinking differs from others are
making unique in India.

Boom on Construction business are pressuring other associated business to


change their strategy and policies in favor this market. Bankers understand
requirement of a new type of investors, who want to invest in this, are providing
home loan to customers on lower interest and under lots of schemes, also providing
customers subsidy home loan, even builders projects in India also dependent on
bankers and their schemes. Government is launching programs to attract property
buyers and appreciating investors to buy property in India.

Impact of each of these factors when looked upon in isolation may not be
significant, but when viewed in totality they offer enormous potential for housing
market growth. Rising income levels in combination with a reduction in average
population age has over the years resulted in the fall of average age of a house
buyer. Analyst expects the trend to sustain in due course of time.

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3.4 MAJOR ISSUES & IMPLICATIONS

The construction industry has registered annual growth of over 10% for past
five years; however this growth has come despite several issues relating to
contracting quality technology, manpower, regulations etc. Some corrective
measures have been adopted to address these problems and overruns in project
execution have dropped from an average of 167% in 2001 to 64% in 2005. Some key
issues and possible remedies are discussed below.

Ø Contract Procedures
The Present contract Procedures for procurement of contractors are highly
cumbersome and expensive for both the project owner as well as contractors. The
Key steps involved in contract procurement process are project detailing,
prequalification documents, invitation of bids, evaluation, and final award of work.
The above activities account for up to 16% of the project cost. Further adding
supervising and monitoring cost about 6% therefore total cost of 22% of asset
created.
There is need for standard contract procedures and evaluation criteria must
be place as model contract. The Grading system for contractors, adaptation of
technology in bidding process like Online tenders etc. must be adapted.

Ø Manpower Shortage

The construction industry in India is facing a huge shortage of manpower,


especially those with skill-sets to sustain the burgeoning growth in infrastructure and
housing sectors. Although the construction industry employs about 31 million
people, second only to the agriculture sector, the workforce requirement is about
five million people per year over the next 7 years to sustain the current 8 percent
growth rate. With only 10 million workers available in the country every year, the
construction industry will face a heavy manpower challenge, as it requires employing
five million people per annum. There is also dearth of contractors due to fact that
while the existing contracting agencies are overloaded, attempts are not being made
to form new ones. (See annexure V)
There is need for institutional training for construction workers.
Infrastructure developers can pool resources and fund for training institutions. CIDC
has initiated multiple HR activities at all levels. State govt. should come up with
initiatives to impart training to workers. Contract conditions should carry a certain
percentage of trained workers must be employed.

Ø Title Clearances
Title clearance in India is a complicated process in the absence of a central
database of properties. This could also add to the cost and delays in a project.

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Ø Procedural & Legal Vulnerability

Development projects entail clearances and permissions from various


government departments. It is estimated that about 60 permissions are required for
developing raw land and starting construction. These delays are tedious and time
consuming and vary from state to state (local laws). Hence adding to overall
complexities of the transaction and increasing the need for a local expertise in each
market.

Ø Urban Land Monopoly

Many cities have created development agencies (like the DDA in Delhi) and
handed over control of all urban land within the municipal jurisdiction to them in the
belief that they would act in the interests of the public. However, such agencies tend
to behave like the monopolies that they are. It is in the interests of the monopolist to
restrict the development and sale of new land and keep prices high, so as to
maximize its own returns. Introduction of a competitive construction boom requires
abolishing the monopoly of such agencies over urban land by completely separating
control of land from its development.

Ø Debatable Tax Status under Section 80I (A)

Section 80-IA of the Income-tax Act provides that where the gross total
Income of an assessee includes any profits and gains derived by an undertaking or an
enterprise from any of the business referred to in sub-section (4) then a deduction
equal to 100% of the profits and gains derived from such business shall be allowed
for ten consecutive assessment years.
Sub-section (4) covers the business of either developing or/and maintaining
or/and operating or any infrastructure facility. As the Income Tax deduction to
developers under this section was available for projects approved before 31st day of
March 2007 and the date was not extended in finance bill 2007, the concession
available under this section for projects sanctioned after 31st day of March 2007 has
ceased.

Ø Infrastructure Bottlenecks

Infrastructure is still a cause of concern in majority of the cities across the


country as recent infrastructure developments have been slow and has not kept in
pace with the development. Inadequate power, absence of drinking water,
electricity failure, traffic congestion, pollution, has become a common feature of all
mega cities in India.

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4. PEST Analysis.

4.1 POLITICAL FACTORS.

Ø SEZ Act to Boost Infrastructural Development

SEZ is the new destination for real estate investors. Currently 150 SEZs are
approved out of which 85 SEZs are in the IT/ITES area and 10-15 SEZs in the
electronics area.130 SEZs are developed by real estate developers which constitute
of about 50% of the total SEZ area. IT SEZ should be developed and made
operational within the period of six months from the date of notification. Thus, 130
approved SEZs would result in investment of US$10 bn to US$ 12 bn immediately.

Ø Cement Prices Reduced for State Infrastructure Projects

The continued thrust on infrastructure development will provide impetus to


the healthy growth in demand, protecting the bottomline of cement companies to
an extent. The reduction in the CST and in freight rates on diesel and limestone will
be marginally positive for some companies.

Ø FDI Liberalization to Augment Industry Growth

Recent amendments by the government have made accessibility to the


required capital much easier. Opening of FDI in construction and allowing developers
to raise capital in international markets has led to developments of larger projects
benchmarked against international standard.

Ø REITs to Positively Affect Real Estate Business

The proposed introduction of REMF (Real Estate Mutual Fund) and REIT (Real
estate Investment Trust) will boost real estate investments from the small investor’s
point of view. This will allow small investors to enter real estate market with
contribution as less than Rs 10,000. The concept of REIT is on the verge of entering
India and would be structured as a company dedicated to owning and in most cases
operating income producing real estate such as apartments, shopping centers,
offices & warehouses.

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4.2 ECONOMIC FACTORS.

Ø Growth in Construction Activity Stimulating GDP Growth

India is witnessing tremendous growth & expansion of construction activities


and construction is largest component of GDP. It has been growing at a rate over
10% in the past few years when GDP growth is around 8%.Within construction;
sectors such as roads, railways, housing and power have been keen drivers.

Ø Rate Hikes Unlikely To Slow Down Growth

It has been analyzed that residential prices have increased by about 15- 20%
on average in the last one year. There has been strong growth in demand supported
by rising disposable incomes, low interest rates, and fiscal incentives on both interest
and principal payments and increasing urbanization.

4.3 SOCIAL FACTORS.

Ø Shifting Consumption Pattern to Fuel Industry Growth

The consumption pattern of Indian households is undergoing a gradual, but


steady change. The share of food and beverages, which used to constitute almost
50% of household spend until 2003 is expected to fall to 45% by FY08. We expect the
share of discretionary items to consistently rise given the rising affordability and
changing aspiration levels. Increased exposure to western lifestyles (through media
as well as overseas travels) has altered the consumption pattern of Indian people.

Ø Rising Urbanization to Boost Industrial Growth

Urban infrastructure consists of drinking water, sanitation, sewage systems,


electricity and gas distribution, urban transport, primary health services, and
environmental regulation. Many of these services are in the nature of ‘local’ public
goods with the benefits from improved urban infrastructure. The urban population
in India will grow by 85 million over the next 10 years.

Ø Green buildings in India

The green building movement has gained tremendous momentum during 3


to 4 years, ever since the Green Business Centre embarked on achieving the
prestigious LEED rating for their own centre at Hyderabad. The Platinum rating for
green building has sensitized the stakeholders of construction industry. There is

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tremendous potential for construction of green buildings in India. The estimated
market potential for green building will be about $ 400 million in 2010.There will be
favorable policies of the government would provide the right impetus for advancing
the green building movement in India.

4.4 TECHNOLOGICAL FACTORS.

Ø Low Technology Adoption to Hinder Growth

The poor state of technology adopted by the construction sector adversely


affects its performance. Upgrading of technology is required both in the
manufacturing of construction material and in construction activities. As a large
number of construction materials are manufactured in the unorganized sector,
effective monitoring and regulation of the production of these materials to ensure
proper quality becomes difficult. Use of low-grade technology in the construction
sector leads to low value addition and low productivity, apart from poor or sub-
standard quality of construction and time overruns in projects. The non-availability
of quality construction tools is the main reason for this. Besides, the construction
sector also lacks information about new technology.

Ø Construction as per Indian Requirements

The construction needs to be done as per Indian standards and requirements


which will demand considerable changes form the international requirements. The
infrastructure requirements of India are much different as the population spread,
increasing urbanization, increasing slums, the small space for roads, the water
problems are more.

Ø Ready-Mix–Concrete Being Experimented With.

The Ready mix concrete business in India is in its infancy. For example, 70% of
cement produced in a developed country like Japan is used by Ready Mix concrete
business there. Here in India, Ready Mix concrete business uses around 2% of total
cement production.

Much of construction done in India is very slow paced. The concrete making
process at site takes much time with variation in quality. The increasing use of ready
mix not only saves on time but allows the better quality. It will also eliminate the
storage space at site, eliminate Procurement / Hiring of plant and machinery, reduce
wastages of basic material, noise and dust at site will be reduced. Also organization
at site will be streamlined. This will improve the rate at which infrastructure can be
built in India.

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5. COMPETITIVE LANDSCAPE

In the first five-year plan, construction of civil works was allotted nearly 50
per cent 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
Transportation and Engineering Services (RITES), Engineers India Limited (EIL), etc.)
and private sector (M N Dastur and Co., Hindustan Construction Company (HCC),
Ansals, etc.).

5.1 STRUCTURE

The Indian construction industry comprises 200 firms in the corporate sector.

In addition to these firms, there are about 1,20,000 class A contractors


registered with various government construction bodies.

There are thousands of small contractors, which compete for small jobs or
work as sub-contractors of prime or other contractors.

Total sales of construction industry have reached Rs. 42885.38 crores in 2004
05 from Rs. 21451.9 crores in 2000-01.

5.2 TOP PLAYERS

n Companies like L & T, GMR Infrastructure, HCC, Gammon, Jaypee


group, etc. which undertake huge projects.

n Companies like IVRCL, Nagarjuna, DLF, Omaxe etc. dealing in flyovers,


pipelines, apartments and housing/office spaces .

Ø Some of the order bagged by construction companies in July 2007 is as shown :

Company Project Rs. crore


Larsen & Toubro Blast furnace project, Tata steel 980
IVRCL infrastructure Irrigation project, Andhra Pradesh govt. 641
Patel engineering Dam construction project 619
Larsen & Toubro IOC refinery project 542
Punj Lloyd Gas pipeline project, RGTIL 498
Nagarjuna construction Road project, NHAI 285

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Ø Order Backlog at end of June 2007 (Rs crore)

ORDER BOOK TO SALES


COMPANY ORDER BACKLOG
RATIO.
Larsen & Toubro 39690 2.26
Punj Lloyd 15225 6.80
Jaiprakash Associates 10500 3.05
Hindustan Construction Co. 9381 3.98
IVRCL infrastructure 9500 3.37
Gammon India 8000 4.32
Nagarjuna Construction 7771 2.71
Simplex Infrastructure 7000 4.09

5.3 COMPETITIVE STRATEGY

Ø LARSEN & TOUBRO

ECC - the Engineering Construction & Contracts Division of L&T - is India's


largest construction organization. Many of the country's prized landmarks - its
exquisite buildings, tallest structures, largest industrial projects, longest flyovers,
highest viaducts - have been built by ECC. Leading-edge capabilities of ECC cover
every discipline of construction: civil, mechanical, electrical and instrumentation
engineering.

• Investing for profitable growth

To build further on the successes achieved, the Company is investing in


multiple spheres - people, technology, capacity expansion both domestically &
internationally and brand building. This is essential for sustaining the growth
momentum and continuous value creation.

• International Business - Strengthening presence beyond India

Coming to international business, Company continues to forge alliances and


invest in international business for enhancing capabilities and achieving its vision of
becoming an Indian multinational with focus in Middle East and China. Joint ventures
have been set up in Kuwait and Saudi Arabia for electromechanical construction in
oil & gas, power and infrastructure sectors. These initiatives will accelerate the
Company's thrust towards its 'Lakshya' target of achieving 25% revenues from
international business.

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• Capacity Expansion

The Company is expanding capacity internationally and within India.


Substantial capacity augmentation at Hazira will help to address the growing
demand in oil & gas industry. Electrical & Electronics division is expanding its
capacity at Mysore, Ahmednagar and Mahape to take care of rapid growth in the
sector. All the divisions of the Company have planned increased investments in
acquisition and installation of new equipment and manufacturing facilities.

Ø HINDUSTAN CONSTRUCTION COMPANY

HCC is distinguished by its boldness of vision and the courage and confidence
it displays in taking on the toughest of challenges. HCC executes the construction of
technically complex and high value projects across segments such as Transportation,
Power, Marine Projects, Oil and Gas Pipeline Constructions, Irrigation and Water
Supply, Utilities and Urban Infrastructure.

In Transportation, HCC has to its credit more than 300 road and rail bridges,
expressways & roads and marine construction. It has built over 100 Environmental
Engineering projects. In addition to all this, it has also built some of India's best-
known industrial structures.

• Collaboration with other companies.

As a part of its future growth strategy, the company is planning to enter into
collaborations with other companies to bid for projects where pre-qualification
requirements can be met jointly.

• Increased Focus on Overseas Market

HCC is currently eying overseas market opportunities to increase its presence


geographically with diverse range of infrastructure areas with increased revenues. It
is also focusing on developing its subcontractor base to cut costs.

Ø JAIPRAKASH ASSOCIATES

Jaiprakash Associates Ltd. the flagship company of the Jaypee Group is an


acknowledged leader in construction of river valley and hydro power projects on
turnkey basis. It has had the unique distinction of simultaneously executing 13

20
hydropower projects spread over 6 states in India and Bhutan to generate 10,290
MW of power. The group has hydro power project orders worth Rs. 9000 Crores.

• Expansion Plans

The group’s focus in future will be on developing a 5000 MW power


generation capacity including wind and thermal by 2014 and further increase the
presence in EPC and construction contracts in Hydro power sector. The estimated
installed capacity of the Group's cement business by the year 2009-10 is likely to be
20 million tonnes per annum.

Ø GAMMON INDIA

Gammon India Limited, the only Indian Construction Company to have been
accredited with ISO 9001 certification for all fields of Civil Engineering Works
including design, stands out as gateway for Technological and Engineering excellence
in Civil Engineering fields

• Establish our presence across diverse sectors and geographies

Gammon is actively focused on becoming a diversified infrastructure player.


It has currently analyzing a number of new potential projects in the infrastructure
sector, including roads, mass rapid transit systems (“MRTS”), urban infrastructure,
ports, airports, power transmission lines, SEZs and hydroelectric power projects,
which will diversify revenue sources and, subject to market conditions and
opportunities. Further, it believes that infrastructure assets should be geographically
dispersed to militate effectively against geographical risks associated with such
assets. Additionally, it also explores opportunities in projects beyond India in the
future.

• Make an early entry and achieve a dominant position in identified sectors

Early entry into identified growth areas in the various infrastructure sectors
within which it operate provides with a head start in each such sector. It also intends
to continue to pursue the advantages associated with early entry in order to achieve
a dominant position within such sectors. By adopting this strategy, it will able to
realize specific advantages of higher margins in certain identified sectors and the
flexibility to grow and allocate its resources to sectors that offer more attractive
margins.

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5.4 FINANCIAL SCENARIO

The construction industry is highly capital intensive. It is imperative for any


construction company to have adequate funds for meeting contractual
commitments. As construction industry is expanding due to government focus on
the infrastructure, financing has been more complex. Construction was declared
Industry under the IDBI act and thus became eligible for financing and incentives.
The benefits mainly enjoyed by the big companies while SME’s struggle to secure
financing.

Financial requirements can be fund based or non fund based. Fund based is
Loans or equity for purchasing materials, equipments, salaries , working capitals etc.
Non fund based includes payment of bank guarantee, advances for mobilization of
purchases, insurance covers etc. Fund based financing has picked up due to private
participation. No construction company of today can survive without access to
commercial credit. Some of financial need of this industry is as follows:

• Banks and financial institutions did not have proper lending norms in place.
There is also delay in release of working capital to contractors.
• There is need to simplify bank guarantees and raise share of bank finance.
The share of industry in non food bank credit is less than 5%. The banks also
charge commission ranging 2 to 3% as compared to 0.2% internationally.
• Lenders are unwilling to lend as they don’t have risk assessment, credit rating
systems. CIDC has put such a system with ICRA. But lots of small contractors
are not graded.
• There is need to introduce new construction specific insurance products. The
risks are higher. Very few policies as machinery policy, all risk policy,
compensation policy etc are available. Overall these policies do not cover all
aspects of complexities in construction.
• Since 96% companies are SMEs, SIDBI introduced schemes which has
improved financing scenario.
• A national level bank to meet the requirement of contractors must be
established. The unavailability of short term bridge finance and an absence of
a system of factoring bills add to the woes of small contractors.
• Construction equipments accounts for nearly 20% of typical project costs.
Small contractors cannot afford to purchase those. The solution lies in
creating Bank for equipments. One of such initiative is Quipo infrastructure
Equipment bank.

This industry is likely to see an annual investment of Rs 6000 billion by the


end of eleven year plan. It is essential to promote the formation of joint ventures
between foreign and Indian construction companies.

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5.5 FINANCIAL PERFORMANCE

Swelling order book positions and conversion of the same into revenues has
helped construction companies to sustain growth momentum. Sales growth which
vacillated in the range of 15-20 per cent in the earlier quarters accelerated to over
30 percent in the March and June 2007 quarters.

5.5.1 Overall industry performance

The construction sector registered a healthy 33.6 percent growth in top


line during the June 2007 quarter. The aggregate numbers are derived from a sample
of 51 construction companies. The sector continued to grapple with high raw
material costs which grew by 46% during the quarter. Another challenge which the
industry is contending with is retaining skilled manpower. Personnel cost during first
quarter grew by a sharp 54%. However a slower 20% rise in other expenses negated
the impact of higher raw material and wages cost. As a result of operating expenses
grew by a slower 31% as compared to sales . The construction sector was thus able to
maintain its operating margins at around 12%for third consecutive quarter. The
same is marked a year on year expansion of 162 basis points from 10.3% in the June
2006.

The construction industry has started to feel the pinch of rising borrowing
costs. After a 31.5 % rise in the March quarter, interest cost grew by a sharp 45%
during the June quarter. However a higher other income cushioned net margins of
the sector which healthily expanded year on year from 5.5% to 7.3%. (Refer
Annexure-I&II)

5.5.2 Company performance

A strong top line performance can be seen across majority of construction


companies.31 out of 51 companies in the CMIE sample recorded over25% growth in
sales. Around 59% of companies in CME samples recorded as expansion of over 130
basis points in net margins in June 2007.

The sectoral index recorded a healthy 12.7% returns and posted excess gains of 7.4%
vis-à-vis the Overall share price index. Reckoned month-on-month, about 70% of
companies posted positive returns.

L&T the largest company by market capitalization continued its upswing. The
scrip touched 52 week high of Rs. 2735 on 24 July 2007 and was up 18.7 % during the
month. L&T registered a 30% rise in revenues to Rs. 4505 crore during June 2007
quarter.

23
No. of shares Trading
Mkt. cap Returns P/E
traded volume Beta
(Rs. Crore) ( %) (Times)
(Lakh nos.) (Rs. Crore)
L&T 74108 18.7 247.0 6039.8 45.7 0.98
Jaiprakash 18239 13.1 245.6 2020.5 39.4 1.36
Aban Offshore 11168 0.4 21.8 672.4 109.0 0.85
Punj Lloyd 7417 10.5 407.1 1118.3 124.5
Lanco Infratech 5327 16.4 410.6 957.7 64.9
Apil 5205 -2.6 85.8 711.3 45.1 1.31
IVCRL 5012 7.5 540.8 2129.3 31.5 1.43
Nagarjuna 3999 7.8 360.5 710.3 23.5 1.51
Gammon India 3858 7.2 58.6 129.7 35.8 0.87
HCC 3562 12.8 420.5 547.4 36.4 1.45
Construction 160686 12.7 3712.3 17042.3 42.2 1.17
Industry
Source: Indian Industry a monthly review: CMIE (July 2007)

5.5.3 Competitor Ratio Comparison

Company Return on Assets Return on Equity


Larsen & Toubro 7.22 37.69
HCC 2.64 3.77
Jaiprakash associates - -
Gammon India 4.15 3.07
IVRCL Infrastructure 5.43 14.00
Nagarjuna Construction 6.25 9.84
Patel Engineering 6.00 23.32
Simplex Infrastructure 5.86 21.10
Ratio data as of 03/31/2007

5.5.4 Stock market Performance


Ø Larsen & Toubro

Assuming that you bought this stock at the closing price on 01-02-
2005 on the BSE, your gain on 31-01-08 is 654.42%. If you had bought on the
NSE, your gain would be 653.42%.

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Ø Jaiprakash Associates

Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 884.43%. If you had bought on the NSE, your gain
would be 883.16%.

Ø Hindustan Construction Company

Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 382.86%. If you had bought on the NSE, your gain
would be 383.1%.

Ø Gammon India

Assuming that you bought this stock at the closing price on 01-02-2005 on
the BSE, your gain on 31-01-08 is 268.89%. If you had bought on the NSE, your gain
would be 268.57%.

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6. INDUSTRY OUTLOOK

The government’s commitments to infrastructure development, especially in


the power and road sectors, are likely to add further impetus to the industry’s
growth.

One key trend that has been observed in past few years and growing is that
foreign companies have begun to enter India either on their own or as joint ventures
with Indian companies there are massive investments expected and it will be good
for these companies to do business in India.

Apart from this the foreign manpower is coming and working India. Recent
case of Reliance invited the Chinese workers to come and work in India and
government permitted them to do so.

Investment in human capital is required to improve the quality of labour. This


must be done through more training and certification institutes to augment the
supply of skilled labour; associating ITIs with training of construction workers;
stipulating the widespread use of trained labour as a prequalification condition for
bidding. The percentages stipulated could be increased over time.

Review of the procurement and dispute resolution mechanism must be


carried out to reduce the cost of construction so that infrastructure services could be
provided at competitive costs.

Upgradation of technology is required to improve productivity and quality as


also to ensure the timely completion of projects.

In future there will be consciousness about environment safety and health


standards. This could result in problems of land acquisitions. The demand for the
green construction, green buildings will become large. The construction industry
must be prepared to take the green standards fast.

A lot of needs to be done on the part of the industry as a whole-that is, by


the clients, contractors, government departments, to improve the scenario.

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10. BIBILOGRAPHY

Ø Indian Industry: A Monthly review, Centre for Monitoring Indian Economy (August
2007)

Ø Chapter 7.7 – Construction - Planning Commission, Govt. Of India, Tenth Five Year
Plan.

Ø Indian Infrastructure journal- January 2007.

Ø CIDC Newsletter-An In house journal of Construction Industry Development Council.

Websites:

Ø www.indiaenews.com/business/20071114/80632.htm
Ø www.equitymaster.com/research-it/india-economy/budget2004/cement.asp
Ø http://planningcommission.nic.in/plans/planrel/fiveyr/10th/volume2/v2_ch7_7.pdf
Ø www.cidc.in/News_Letter/NL_29.pdf
Ø construction.indianetzone.com/1/national_building_code.htm
Ø www.lntecc.com/home.htm
Ø www.hccindia.com/index.asp
Ø www.thehindubusinessline.com/2003/07/29/stories/2003072901480400.htm
Ø www.iitk.ac.in/nicee/RP/2004_Challenges_Construction_Industry_Proceedings.pdf
Ø www.iimcal.ac.in/community/consclub/ppts/cementAndConstruction.ppt
Ø www.greenbusinesscentre.com/images/photos/7.pdf
Ø www.lntecc.com/concrete/aboutreadymix.asp#present
Ø http://www.moneycontrol.com/stocks/companydetails/histdata.php

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