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Press Release   •   Nov 21, 2011 14:57 IST

Investment in the infrastructure sector plays a crucial role in the growth of the economy and in turn the construction industry. In the last few years, the rapid growth of the economy has put a tremendous pressure on the physical infrastructure of the country. In order to sustain the economic growth, the government has lined up huge investments across various infrastructure segments. The total investment planned in the infrastructure sector during the Twelfth Five Year Plan is estimated to double that in the Eleventh Five Year Plan.
 Investment in the infrastructure as a percentage of GDP has increased from 4.5% in FY04 to 7.9% in FY11. The Planning Commission has estimated that, for the GDP to continue to grow at 9%, the proportion of investment in infrastructure as a percentage of GDP is required to increase from the targeted 8.4% in FY12 to 10.7 % by the terminal year of Twelfth Five Year Plan i.e. FY17. industry analysis reports
 Using the top-down approach, the investment in the infrastructure sector during the Twelfth Five Year Plan is estimated at a massive Rs.41,000 bn. Based on construction intensity of the various infrastructure projects and similar allocation among sectors during the Eleventh Five Year Plan, the indicative effective construction investement is estimated at a whopping Rs.20,000 bn during the Twelfth Five Year Plan.
 Industrial sector –construction opportunity of more than Rs.4,200 bn …
 Apart from infrastructure projects, the construction industry also receives orders from different manufacturing industries to execute construction work for industrial plants and related civil construction. The construction industry had been benefiting from the rise in industrial production in the past few years. As on June 30, 2011, the total outstanding investment in the industrial sector stood at about Rs.35,000 bn. Omitting the investment which is already under implementation from the total outstanding investment, CARE Research estimates the effective construction investment of more than Rs.4,200 bn during the next 4-5 years period.
 Eventhough, the construction opportunity from both infrastructure and industrial sectors looks immense; order inflow in the near term is likely to be affected due to slowdown in capex cycle and awarding of infrastructure projects by the government.
 Delay in project execution to hamper the revenue growth...
 In the past few years, with the improvement in the macroeconomic conditions and the growing emphasis of the GoI on improving infrastructure in the country, construction companies have been benefited. This is evident from the bulging order backlog positions of the leading construction companies. The multiple of order backlog to sales has been in the range of 2.4 to 3.3 times over the past five years. In FY09, due to the overall economic slowdown and poor liquidity conditions, the multiple had declined to a level of 2.4 times. However, with the improvement in the macroeconomic scenario in FY10, awarding of infrastructure projects caught pace and the multiple increased to three times. At the end of the FY11, the multiple reached a level of 3.3 times which was mainly on account of the muted topline growth due to poor order execution. Eventhough, the multiple of aggregate order backlog to sales at 3.3 times shows the decent revenue visibility for the construction companies, execution of the order backlog remains a key challenge due to various issues.
 On account of this, almost 30-35% of projects in the existing aggregate order backlog are slow moving or stuck which can hamper the project execution to a great extent and drag down the revenue growth. Taking this into consideration, CARE Research has estimated that construction companies are expected to register revenue growth at a CAGR of 29% during the period FY 11-14, much below the potential revenue growth.
 No respite on the margins front for construction companies …
 The PBIDT margin of construction companies largely depends on the order backlog mix, movement in prices of key raw materials and the extent of escalation clauses built into the contracts. Despite of the favourable order backlog position, the PBIDT margin of construction companies was under pressure in FY11 due to sluggish revenue growth led by the delay in order execution and fairly high prices of key input materials like steel, cement, bitumen, copper etc.
 In FY 12, prices of key input commodities are expected to remain firm. With intensified competition and delay in execution of order backlog, profitability of the construction industry will remain under pressure. The PBIDT margin of construction companies is expected to remain in the range of 15-16% in FY 12. Moreover, increased borrowings and high interest rates will continue to hit the bottom line of the construction industry.
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