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

With the economic slowdown, the order inflow to construction companies had slightly slowed down in FY09. Profitability margins of the construction industry were under pressure as the prices of key raw materials like cement & steel were hovering at peak levels. To bring back the economic growth on track, the government had announced a few stimulus packages. The emphasis was given mainly to ease the liquidity and liberalize the lending policies to provide funding to the long-term infrastructure projects. Post elections in early FY10, the government has been focusing on awarding projects under different infrastructure segments. Moreover, with the recovery in the macro-economic conditions and the industrial sector, the order inflow to construction companies has gathered momentum in FY10.

The Government of India (GoI) has set an ambitious target of increasing the proportion of the infrastructure investment to about 9% of Gross Domestic Product (GDP) by the terminal year of the Eleventh Five Year Plan. For the GDP to continue to grow at 9%, this proportion is targeted to increase further to 10.3% by the end of the Twelfth Five Year Plan. This will bring about a massive investment to the tune of more than Rs. 40,000 bn in the infrastructure sector. The power and road sector are estimated to account for the major chunk of the investment planned in the infrastructure. In order to achieve the mammoth investment target, the GoI is seeking the support of the private sector through Public Private Partnerships (PPP). It is estimated that almost 60% of the power generation capacity addition in the Twelfth Five Year Plan will be contributed by the private sector. To encourage the participation of private companies in the road sector, the Ministry of Road has taken various initiatives like relaxing the land acquisition norms, providing cost overruns and increasing the concession period. The construction industry is expected to witness strong momentum in the order inflow as the awarding of projects in infrastructure and industrial space progresses. From the power generation segment alone, construction orders worth almost Rs. 1,370 bn are expected to flow to the construction sector in the next 3-4 years. Under the road sector, more than 36,000 kms of roadways are yet to be developed. This is likely to generate potential orders of worth about Rs. 1,800 bn. Furthermore, the outstanding investment in the industrial sector could potentially translate into an effective construction investment of about Rs.2,900 bn during the next 4-5 years period.

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

Get more information about this report: Report on Indian Construction Industry

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