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159774810 Economic Analysis of Indian Construction Industry
Derivatives and Risk Management (Options, Futures and Derivatives)
SVKM's NMIMS
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Global Business
Project II
Economic Analysis of
Construction Industry in
India
Submitted to: Submitted by:
Prof. Narender P. Venkata Sai Charan
Nandigam Vivek
Aishwarya Rai
Introduction
India is the second fastest growing industry in the world and construction contributed a huge amount in Indian service sector. The size of the construction industry in India is about 2 trillion (2008). India’s construction industry has grown at a Compounded Annual Growth Rate (CAGR) of 14% over the last four years on the back of massive infrastructure investment and rapid rise in housing demand. Investments in construction have positive domino effect on supplier industries thereby contributing immensely to economic development. The construction sector has strong linkages with various industries such as cements, steel, chemical, paints, tiles, fixtures and fittings. While in the short term it serves as a demand booster, in the long term it contributes towards boosting the infrastructure capacity. The growth of India’s construction industry due to the delay in completion of infrastructure projects has gradually dipped from about 30 per cent in 2007 to over 20 per cent in 2010 and to the current level of about 12 per cent. Market size of India’s construction industry might not even reach Rs 30,000 crore mark by 2015 from the current level of about Rs 21,000 crore as the labour intensive sector has been constantly grappling with the shortage of workforce.
Objectives:
- To Study the trend of growth in the Indian Construction Industry.
- To know the contribution made by the Construction Industry in the GDP of the country.
- To analyse the strengths, weaknesses, opportunities and threats.
- To know the factors effecting the industry
- To know the major players and regulators.
Economic Analysis
The Construction Industry of India is an important indicator of the development as it creates investment opportunities across various related sectors. The industry is fragmented, with a handful of major companies involved in the construction activities across all segments; medium sized companies specializing in niche activities; and small and medium contractors who work on the subcontractor basis and carry out the work in the field. The sector is labour-intensive and, including indirect jobs, provides employment to more than 35 million people.
History:
The period between the 1950’s to the mid 60’s witnessed the government playing an active role in the development of these services and most construction activities during this period were carried out by state owned enterprises and supported by government departments. In the first five year plan, construction of civil works was allotted nearly 50% 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 Transport and Engineering Services (RITES), Engineers India Limited (EIL), etc.) and private sector (MN Dastur & Company, Hindustan Construction Company (HCC), Ansals, etc.).
Present Scenario:
India is on the verge of witnessing a sustained growth in infrastructure build up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, and rail transport and airport development. While the construction sector’s growth has fallen as compared to the pre-2008 period, it has picked up in the recent past. Its share in the GDP has increased considerably as compared to the last decade.
From the policy perspective, there has been a growing census that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country, Given that the resource constraints of the public sector will continue to limit public investment in infrastructure, especially backward and rural areas. At the same time reviewing the factors that constrain private industry would be necessary to encourage and speed up the process.
The real estate industry comprising of construction and development of properties has grown from family based entities with focus on single products and having one market presence into corporate entities with multi-city presence having differentiated products. The industry has witnessed considerable shift from traditional financing methods and limited debt support to an era of structured finance, private equity and public offering.
The construction sector is a major employment driver, being the second largest employer in the country, next only to agriculture. This is because of the chain of backward and forward linkages that the sectors have with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, and timber and building material are dependent on the construction industry. A unit increase in the expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.
Key Points:
Supply The past few years have been a substantial increase in the number of contractors and builders, especially in the housing and road construction segment. Demand Demand exceeds supply by a large margin. Demand for quality infrastructure construction is largely emanating from the housing transportation and urban development segments. Barriers to entry Low for road and housing construction. However high working capital requirements can create growth problems for companies with weak financial muscle. Bargaining power of suppliers
Low. Due to the rapid increase in number of contractors and construction service providers, margins have been stagnant despite strong growth in
Financial Year ‘
The construction industry witnessed a slowdown in FY12, after the economy showed some resilience in the preceding two years. With the overall GDP slowing down, the growth in the construction industry dipped to 4% in FY12. In addition, the high levels of inflation led the RBI to keep the interest rates high, thereby reducing investments. Project financing also became difficult on the back of the increasing gestation periods of the projects, thereby leading financial institutions to take a cautious approach towards funding projects in the sector.
The 2011-12 budgets saw the government double the financing limit of financing infrastructure projects to Rs 600 bn.
On an overall basis, companies from the real estate and construction sector faced issues related to higher interest costs on the back of leveraged balance sheets. The Reserve Bank of India kept the interest rates on the higher side due to concerns over the high inflation levels. Towards the end of the year, a handful of companies announced plans to improve the health of their balance sheets by selling off their stakes in the non-core
Source: infrawindow/reports-statistics/construction-et-al-us-500-bn-in -the-fray_71/
businesses and improving the cash collection cycles, launching and bidding for projects on a selective basis, amongst others.
Employment in the Industry:
This industry is labour intensive and, including indirect jobs it provides employment to more than 35 million people. The construction industry is a major employment driver. It is the second largest employer in the country after agriculture.
Expected growth of wage and salary jobs in the construction industry was about 15% through the year 2012. Employment in civil and heavy engineering construction is projected to increase due to increase in highway, bridge and street construction.
It is estimated that about 70 % of the employees are employed in infrastructure segment and remaining 30% in the real estate segment.
According to industry estimates, the industry is expected to generate additional employment of 47 million, with the total number of persons employed in the sector reaching 83 million persons by 2022.
Financial Statistics:
1.) Sales Growth
2.) Expenses Growth
3.) PBDIT Growth
4.) PAT Growth
Stock Market Statistics:
1.) Market Capitalization
2.) Price-to-earnings ratio
3.) Total Trading Volumes
4.) Index Returns
SWOT Analysis
Strengths of Construction Industry:
- Good structured national network facilitates the boom of construction industry.
- Low cost well-educated and skilled labour force is now widely available across the country.
- Sufficient availability of raw material and natural resources in a country is supportive for the industry.
- Increase in construction of the multi building projects on the feasible locations in the country.
Weaknesses of the Construction Industry:
- Chances of Natural Disadvantages.
- Distance between construction projects reduces business efficiency.
- Training itself has become a challenge.
- Changing skill requirements and an ageing workforce may bring out the skills gap.
- Huge amount of money needed to be invested in this industry and inefficiency may lead to high level of risk.
Opportunities for Construction Industry:
- Continuous private sector housing boom will create more construction opportunities.
- Public sector projects through public private partnerships will bring further opportunities.
- Massive increase in Indian urban population.
- Financial supports like loan and insurance and growth in income of people is in support of construction industry.
- Historical cultural heritages like the TAJMAHAL encourage and provide a creative platform for the industry.
- Remote areas in the country are easily accessible and plenty of land is available in the country.
Threats to Construction Industry:
- Long term market instability and uncertainty may damage the opportunities and prevent the expansion of training and development facilities.
- Political and security conditions in India.
- Natural abnormal casualties such as earthquake and floods are uncertain and can prevent the construction boom.
- Improve in long term career prospects is highly required to encourage staff retention and new entrants.
Porter’s Five Force
Analysis
Intensity of Competitive rivalry:
- Sustainable competitive advantage through innovation.
- Level of advertising expense.
- Powerful competitive strategy.
- Flexibility through customization, volume and variety.
Threat of New Entrant:
The existence of barriers to entry.
Brand equity
Capital requirements
Customer loyalty to established brands
Industry profitability.
Threat of Substitutes:
- Buyer Propensity to substitute
- Ease of substitution
- Quality depreciation
- Substandard products
Bargaining power of Buyers:
- Bargaining Leverage
- Buyer information availability
- Availability of existing substitute products
- Buyer price sensitivity
Bargaining power of Suppliers:
- Presence of substitute inputs
- Strength of distribution channel
- Degree of differentiation on inputs
- Supplier competition.
159774810 Economic Analysis of Indian Construction Industry
Course: Derivatives and Risk Management (Options, Futures and Derivatives)
University: SVKM's NMIMS
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