1. CONSTRUCTION INDUSTRY

2. In the fields of architecture and civil engineering, construction is a process that consists
of the building or assembling of infrastructure. Far from being a single activity, large scale
construction is a feat of human multitasking. Normally, the job is managed by a project
manager, and supervised by a construction manager, design engineer, construction
engineer or project architect.
For the successful execution of a project, 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 the public caused
by construction delays and bidding, etc.
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. 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

3. Break-Up of Construction costs
Material Equipment Labor Finance Enabling Admin Surplus
(%) (%) (%) (%) Expenses Expenses (%)
(%) (%)
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 41-44 20-22 12-14 7-8 5.5-6.5 3.5-4.5 5-6
Plant
Source: Construction industry development council

4. Some interesting facts about the industry
• 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 stays at a staggering 8.1% for the year 2011-2012
• Construction industry roughly employees 33million people, more than any other sector
aside 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 has
grown. The sector is very fragmented. There are hundreds of mid-sized and small
unorganised 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 various
stages of the pipeline according to CMIE. The Twelfth Plan alone is supposed to
contribute Rs 41 lakh crore worth of infrastructure creation with about half coming from
the private sector. Urban development, private sector projects, and so on, make up the
rest.

5. 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 and
commercial, rehabilitation, improvements, repair and maintenance .However, only
housing, industrial and infrastructure sectors largely contribute to the construction
output in Sri Lanka. It is therefore in this light that output in those sub sectors are
analyzed to review the trend of construction.
• The demand of construction industry is depend on interest rates, the cost and
availability 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, project
delivery systems had a direct bearing on the demand in this sector.
•The emergence of private property development companies made a considerable
impact on construction demand in this sector, particularly in urban areas where
demand grew rapidly with the expansion of the urban population. As a result,
condominium style apartments and pre-built luxury housing schemes were built in
urban/suburban areas.

6. CHALLENGES FACED BY THE INDUSTRY
The construction sector in India currently faces a number of challenges. The Reserve
Bank of India (RBI) raised benchmark interest rates on multiple occasions since
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 issues concerning land acquisition; approvals and clearances; fuel
security and pricing; counterparty credit risks and policy issues. In FY 11, new projects
announcements by the government sector also slowed down due to delays in
decision 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, representing
a 42% increase on a y-o-y basis (15% on q-o-q basis). Consequently, the y-o-y revenue
growth of construction companies in Q1/Q2 FY 12 has been the slowest as compared
to the past few years. The reduced pace of execution is also evidenced by the
significantly lower y-o-y growth of 2.7% (at FY 05 prices) in construction GDP in H1 FY
12 as compared to 7.2% y-o-y growth in H1 FY 11

7. ORDER BACKLOG OF COMPANIES IN SAMPLE SURVEY
Based on the order books of 15 companies covered in the sample, most companies had
healthy 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 to
5.0x and an average of 3.4x. The corresponding averages as of 30 June 2011 and 31 March
2011 were at 3.34x and 3.35x; the relatively flat averages indicate sluggishness in new
order inflow and relatively slow execution

8. NEW PROJECTS ANNOUNCEMENT
In 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.

9. 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

10. Some relevant information and statistics related to construction
industry
Projects awarded by NHAI(in Kilometers)
Outstanding Bank Credits to Road Sector

11. Year-on-Year Growth in Key Financial Indicators for Companies
in Sample
Revenue growth of companies selected in the sample

12. Construction Industry share in GDP for the past few
years

13. The positive signs that would benefit construction industry in
2012-2013:
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,C
Impact 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 2011-2012
B. 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.

14. • Research estimates the total investments in construction to nearly double over
the next five years ended 2015-2016, to Rs 18.4 trillion. The growth 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 infrastructure sectors.
•Construction investment in individual segment is expected to amount Rs 2.7
trillion over the next five years , with the investment in gas and oil sector being the
principal investment
•The construction industry’s operating margin in expected to decline by 150-200
basis points by 2013-2014 . The pressure 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 contract pricing

15. Expected growth in the next few years
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. Fiscal 2011-12 would see construction industry grow 8.2%.
Thus, the growth would once again bounce back and will be faster than the overall
GDP growth

16. CONCLUSION
The cash flows 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 companies with
a favourable capital structure; moving order book; relatively low working capital
intensity and low commitments toward equity contribution in BOT projects would be
better 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)