Mar 1 2014 | Focus

Booster needed

Amidst global economic slowdown, the Indian economy is still growing at around 5 per cent. But the country holds immense potential as it gears up to build infrastructure in terms of airports, ports, power plants, roads, expressways, housing, industrial corridors, retail properties, water infrastructure and lots more. The country expects investment to the tune of US$ 1 trillion during the XII five year plan. The global slowdown has no doubt affected the growth rate of the Indian economy. But experts and investors worldwide believe that India will bounce back with opportunities never seen before. The economy is opening up for foreign investment in varied sectors. Lots of collaboration is happening across sectors. The reforms are initiated in many a sector. The policies are being made or amended so as to make it investor and environment friendly. The domestic market itself is so big that if you consider just the housing sector. More than 18.78 million dwelling units are required for the urban population in India. With growing urbanization the demand for housing and infrastructure is on the rise. So the opportunity for companies in the construction sector is huge. The Government is making efforts to revamp the transport sector by building more roads, highways, expressways, metro rail, mono rail, etc. All these points to the northward movement of the construction sector in the long run. Sandeep Sharma examines...


The construction is the second largest sector in India after agriculture. The construction industry is one of the largest employment provider in India. The sector is highly labour intensive and provides employment to more than 35 million people in India. The industry is highly fragmented and dominated by large number of unorganized players found at every nook and corner of the country. The organized sector comprises builders and developers, independent contractors, equipment suppliers and other firms who manage their business in a more professional and organized form. Many of these are members of some industry association or the other. For example: BAI is the apex body of the Indian engineering and construction industry having more than 13,000 members. Indian Construction Equipment Manufacturers Association (ICEMA) is the association of construction equipment manufacturers in India. ICEMA is affiliated to the Confederation of Indian Industry (CII) and presently represents 53 leading companies who manufacture, trade and finance a variety of products such as hydraulic excavators, wheel loaders, backhoe loaders, motor graders, vibratory compactors, cranes, dumpers, tippers, forklifts trucks, dozers, pavers, batching plants, diesel engines, etc

As the country grows, there is a shift towards the organized sector. The expected demand shift in the long run would lead to bigger projects in the urban areas. These project would demand expertise of the highest level, which the small unorganized players cannot meet. In future, the small players will have to consolidate into a formidable player with sufficient resources to meet the rising aspiration of the end user in terms of quality construction and maintenance.


The construction sector is classified in two broad segments: 1) Real Estate 2) Infrastructure. The real estate segment comprises a) Residential construction which includes housing and development. b) Industrial construction which includes construction of industrial parks, factories, plants, etc. c) Corporate which includes construction of office space, research and development centre. d) Commercial construction including retail shops, malls, showrooms and hotels. As per an earlier industry estimate, between Years 2012 to 2016, the real estate sector is expected to account for 43 per cent of the construction spend in India. The real estate sector is expected to grow at 13.6 per cent CAGR during this period. The PwC report estimates that the market for real estate construction segment in India is likely to aggregate to approximately US$ 380 billion over the five year period, 2012 to 2016. The Infrastructure segment comprises: a) Road construction b) Railways c) Urban infrastructure including water supply infrastructure, sewerage and drainage systems, educational institutions and secured installations. d) Port construction and maintenance e) Airport construction and f) Power plant construction.


The Indian economy moved in top gear from 2003-04 till 2007-2008. The Gross Domestic Product (GDP) was growing at more than 8 per cent every year since 2003/04. It even touched 9 per cent mark in the financial year ending March 2008. Then the economy slowed down owing to global and domestic factors. The GDP figures touched a low of 4.4 percent in Q1 of 2013-14 from 7.5 percent in the corresponding period in 2011-12. Growth in the third and fourth quarter of the current year is expected to be 5.2 percent and that for the whole year has been estimated at 4.9 percent. The Government of India is trying its best to bring back India on the growth path. As per PwC report, India is expected to emerge as the world’s 3rd largest construction market by 2020. The growth in the construction
sector is estimated to be 1.7 per cent during 2013-14 as compared to growth of 1.1 per cent in 2012-13. One of the vital component of the construction sector is the real estate construction. This sector has registered a growth of over 5 per cent as per Ministry of Statistics & Programme Implementation press release on 7th February, 2014. The growth of construction sector directly affects the growth of the sectors like cement, bitumen, iron and steel, chemicals, bricks, paints, tiles etc. The key indicators of construction sector, namely, cement production and steel consumption have registered growth rates of 3.7 per cent and 0.5 per cent, respectively, during April-December, 2013-14. As per advance estimates of GDP at factor cost by economic activity, the contribution of ‘Construction sector’ to the overall GDP at current prices is ` 8,20,749 crore for 2013-14. The sectoral contribution to the GDP has grown by 8 per cent in 2013-14 as compared to 10 per cent in 2012-13.


Construction is taken as part of service sector. The National Accounts classification of the services sector incorporates trade, hotels, and restaurants; transport, storage, and communication; financing, insurance, real estate, and business services; and community, social, and personal services. In the World Trade Organization (WTO) list of services and the Reserve Bank of India (RBI) classification, construction is also included.


According to LIC Housing Finance, the contribution of housing and construction to the GDP is quite significant. For every rupee invested in housing and construction, 78 paisa gets added to the GDP. This shows the tremendous potential of the construction sector to drive the entire economy. Housing ranks fourth in terms of the multiplier effect on the economy, ahead of sectors like transport and agriculture. The ancillary industries like cement, paint, tiles, bitumen and building material growth is in direct proportion to the growth of real estate and construction sector.


The contribution of private sector is growing in the infrastructure development of the country. The Government of India has taken number of initiatives and launched public private partnership program in number of sectors like road, airport, and ports construction. Their share in infrastructure investment increased from 22 per cent in the Tenth Five Year Plan to 38 per cent in the Eleventh Plan and is expected to be about 48 per cent during the Twelfth Five Year Plan. Speaking at the inauguration of the swanky airport terminal (T2) of the Chhatrapati Shivaji International Airport in Mumbai, Prime Minister of India Dr Manmohan Singh underlined government’s commitment for infrastructure development through progressive policies and effective regulatory regimes. “Infrastructure deficit in the country is considered as a serious constraint limiting our rapid economic growth. And, therefore, we need to work doubly hard to bridge this deficit” observed the Prime Minister. “The Government alone cannot make very large investment required to build world-class infrastructure in the country, and, therefore, we have been encouraging partnerships with the private sector” he added.


India has attracted multi-billion dollar investment in the construction sector not only from domestic companies but foreign as well. The construction equipment market is largely untapped. The country has opened up lot of sectors for investment; the focus is on constructing roads, ports, power plants, housing, water supply and other urban infrastructure. This has paved the way for the construction equipment demand to grow phenomenally. The India’s earthmoving and construction equipment (ECE) industry has grown strongly over the last seven years as a result of rapid economic development in the country. As per the IIIECIAL study conducted by Accenture, the ECE industry has the potential to expand six to seven times - the total revenue of US$ 3.3 billion in 2010 to US$ 22.7 billion in 2020.


1. Falling operating profitability
2. Liquidity issues due to tight monetary conditions
3. Slow pace of development
4. Working capital issues
5. BOT projects becoming less attractive

Global research firm KPMG building and construction (B&C) team recommends the following for engineering & construction (E&C) firms to focus on so as to meet the rising challenges in the sector. Recommendation includes: 1) Increase efficiency at all levels could help E&C firms to protect their project margins by managing cost and submitting the most competitive bids while still maintaining profitability. 2) Assessing competitive edge helps firms to win new orders. The focus on building the right process and procedures enables the firms to identify and fill in the gaps at an early stage so as to enable them to bag new orders. 3) Proper risk management strategies and right kind of accounting policies ensures the identification of issues and mitigation at an early stage. This helps in protecting future profits and preventing negative publicity. 4) Focusing and grabbing growth opportunities in challenging times can be the key to thriving in adverse situations.


The construction and infrastructure players are current under tremendous stress. Funds have become dearer due to tight monetary policy adopted by RBI. The companies are failing to service their debt in time. The rising debt is taking its toll on the major players of the infrastructure sector in India. Many of them have filed their application with corporate debt restructuring (CDR) cell.

The CDR mechanism is devised to provide viable firms additional time to meet their debt obligations, subject to certain terms and condition prescribed by RBI. The banks have referred more than Rs 1 lakh crore worth of stressed assets to CDR cell between April and December, 2013. IVRCL has initiated Corporate Debt Restructuring (CDR) process under the Reserve Bank of India guidelines to get its loan repayment period re-scheduled and extended. IVRCL has nearly Rs 3,000 crore debts which include short-term borrowings to the tune of Rs 2,795 crore as on end of September, 2013. The company has been incurring losses for quite some time. The total net loss of the company was Rs 211 crore registered in the first six months of the current fiscal.

GMR Infrastructure Ltd has informed BSE recently that the Board of Directors of the company at its meeting held on January 24, 2014, has accorded approval for raising of funds through issue of foreign currency convertible bonds and / or other securities up to an amount of Rs. 2,500 Crore through follow on offer, further public offer and / or private placement etc. The infrastructure company debt burden is estimated to be about Rs 40,000 crore. The company is in the process of reducing its debt burden and consolidating its balance sheet through divestment of some of its assets and in some cases partial sell out of its stake to pare its debt.

Real Estate firm Unitech is planning to divest its stake in two hotels located in Delhi and Noida and few land parcels in the south. As part of its divestment plan, it is selling 200-room Country Inn and Suites in Gurgaon. This property is operational. Another 250-room Marriott hotel in Noida under construction is also lined up for sale. These two hotels would yield Rs 600 crore. The land parcels across Bangalore, Chennai and Mysore in south India admeasuring 30 acre is being sold at Rs 300 crore. The company aims to reduce its debt burden by selling off stake in hotel properties and land parcels. Unitech was established in 1971 and is one of the leading builder with properties in Gurgaon, Noida, Bangalore, Chennai, Kolkata, Mysore, Mohali, Rewari, Ambala, Bhopal, etc.


The internal assessment conducted by the Planning Commission puts the overall investment in infrastructure sector at Rs 534,645 crore in 2012-13, that has declined in comparison to the previous year. Some of the sectors including water supply, sanitation and irrigation registered increase in investment. The investment in irrigation is pegged at Rs 69,344 crore (at 2011-12 prices) depicting an increase against Rs 51,603 crore in 2011-12. The investment in water supply and sanitation also registered an increase over the previous year. It was Rs 31,201 crore in 2012-13 against Rs 25,761 crore in 2011-12. India is targeting $1 Trillion investment in various sectors. The first year of the 12th Five year plan (2012-13-2016-17) is not at all encouraging as far as investments in infrastructure are concerned. The development of infrastructure sectors moved at a snail pace owing to land acquisition, environment and forest clearance, funding issues, lack of clarity in policies, etc.


The demand for quality construction is on the rise not only the metro cities but also the emerging cities of India. The growth drivers for construction and real estate sector include favourable demographics, increase in the purchasing power or the household income, demand-supply gap for housing. The sector is evolving and taking a step forward towards professional conduct and transparent mechanism and regulation. According to property research firm Liases Foras, the home sales have bounced back in third quarter of the current financial year. The top six cities have reported 22 per cent rise. The city of Bengaluru posted 58 per cent growth between October and December, 2013 compared to corresponding period in the previous year, Pune rose by 48 per cent, MMR by 26 per cent, while NCR registered just 4 per cent growth. The realty prices rose only by 1 per cent in MMR and 2 per cent in NCR. The new launches saw a 14 per cent decline in the quarter, despite it being a festive season.

To give impetus to the construction and infrastructure sector, the Government of India has formed a Project Monitoring Group to fast track delayed projects. The Public-Private Partnership Appraisal Committee (PPPAC) has recommended in January, 2014 Public-Private Partnership (PPP) Projects worth Rs 7,595.19 crore. PPPAC granted approval to five road projects of Ministry of Road Transport & Highways. PPPAC was constituted in January 2006. Till date, the committee has approved 272 central sector projects with total project cost of Rs. 2,96,579.6 crore. These include 223 national highways, 32 ports, 2 airports, 1 tourism infrastructure, 8 housing and 5 sports stadia projects. In the current year, a total of 19 projects with total cost of Rs. 43,903.30 crore have been approved by the PPPAC. Dedicated Freight Corridor project is one such project which can change the face of the Indian economy. DFCCIL, a Special Purpose Vehicle (SPV) is formed and is engaged in planning, construction, operation and maintenance of the dedicated freight corridors. In the first phase, the two corridors, namely, Eastern Corridor from Ludhiana to Dankuni (1839 km) and the Western Corridor from Dadri to Jawaharlal Nehru Port (JNPT) (1499 km) are being constructed. The entire Western Corridor is being funded by Japan International Cooperation Agency (JICA), while the Eastern Corridor from Mughalsarai to Ludhiana is being funded by the World Bank. Development of National Investment and Manufacturing Zones (NMIZ) is another growth driver for the construction and infrastructure sector. NMIZ will be mega industrial zones with world class supporting infrastructure. NIMZs will be developed as standalone integrated industrial townships. Infrastructure will be built/provided by the Centre and the land would be offered by the state government.


The Ministry of Housing and Urban Poverty Alleviation collaborated with Reserve Bank of India to release the results of the Pilot Housing Start Up Index (HSUI) on 3rd February, 2014. Dr Girija Vyas, Minister of Housing and Urban Poverty Alleviation while giving her keynote address, spoke about the macro-economic linkages of the housing sector having a significant effect on 254 ancillary industries, around 10 per cent contribution of this sector to the country’s GDP and the resultant significance of the HSUI in being a key macro-economic indicator. India is one of the seven countries in the world to have such an index. The countries like Canada, United States, Japan, France, Australia and New Zealand are compiling data related to housing starts, on a regular basis. The Minister said that
this pilot index covers 27 cities and efforts will be made for its expansion to cover 300 cities in near future.


India Ratings & Research (Ind-Ra) maintains a negative outlook on the construction sector for FY15, owing to strained liquidity resulting from lengthened working capital cycles and restrained lending by banks. While revenue has remained flat, EBITDA margins have fallen and debt levels continue to rise, leading to deterioration in credit metrics. According to the ‘Global Construction 2015’ - a study conducted and published by Global Construction Perspectives and Oxford Economics - third in the series indicates that the three countries - China, the US and India are likely to show remarkable growth, which would outpace global GDP. “World construction markets are at a tipping point already with 52 per cent of all construction activity in emerging markets today. We expect to see this increasing to 63 per cent by 2025, with China and India contributing most to growth in emerging markets,” says Graham Robinson, Executive Director, Global Construction Perspectives. This report released in July 2013 forecasts that the volume of construction output will grow by more than 70 per cent to US$15 trillion worldwide by 2025. India will overtake Japan as the third-largest construction market with annual growth averaging 7.4 per cent annually in construction expected to exceed that of China. It’s just a matter of time, the scaling up of construction activity itself will revive the Indian economy. The construction sector promises a lot and is likely to emerge as winner in the long term.

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