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Indian Construction Industry

Construction industry in India is highly fragmented. There are number of unorganisedplayers in the industry which work on the subcontracting basis. Construction activity

being labour intensive, construction companies have been focusing on mechanisation

over past few years. Consequently, growth in quantum of labourers required has declinedfrom 1.6% in FY 04 to 0.9% in FY 08. Mostly all projects in Construction industry are

working capital intensive.

Construction industry expected to witness effective investment over Rs. 10,000 bn during

the 11th five year plan Construction is the second largest economic activity in the country

next to agriculture. With its backward and forward linkages, Construction industry has

generated employment for 33 mn people in the country. In FY 08, Construction sectorcontributed about 8.5% to the countrys GDP. Over past 3 years, construction as a

percentage of GDP has increased from 8.0% in FY 06 to 8.5% in FY 08. The multiplier

factor between growth rates of construction and GDP has been about 1.5X-1.6X.

Construction project can be materialised through number of small contracts which mainly

depend upon size of the project and diversified nature of activities to be carried out in the project. As a result, subcontracting is a common phenomenon in the construction

industry. Some complex infrastructure and industrial projects call for specific expertise

which a single contractor may be inept to execute. As a result, industry is witnessing

rising joint ventures which help contractors to share professional and technologicalexpertise.

Cost structure of the construction industry is dominated by raw material cost andsubcontracting cost. Raw material cost which is the major cost accounts for 30-50% of

the total cost and subcontracting cost accounts for about 20-40%. Cost structure of a particular construction company also depends on its order mix. This is becauseconstruction projects from different sectors require varied level of raw materials and

subcontracting work. Major raw materials consumed by construction industry mainly

include cement and steel. Almost all domestic cement consumption is attributed to theconstruction industry. Steel requirements of the construction industry prominently

includes long products like reinforcement bars/rods, structurals and galvasnized steel.

Consumption of steel by construction industry has grown of 16.1% over past 5 years

whereas cement consumption has registered of 9.6%. Unprecedented rise in prices ofthese two raw materials has a direct impact on the cost of the project and in turn margins

of construction companies. Profitability also depends upon the diversity of the projects a

company can execute. Companies having strong presence in segments like power andindustrial segment which are complex to execute, tend to enjoy higher margins.

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IVRCL infrastructure & Projects (IVRCL) Group is one of the India's largest

construction companies with a turnover of over Rs. 5,500 Crores and net worth in excess

of Rs. 3,000 Crores. The Group has substantial presence in core infrastructure sectors ofWater, Power, Transportation, Buildings & Industrial Structures, Real Estate, Process

Equipment Design Engineering, three manufacturing units and three listed entities. The

projects are spread across the Country.

Strongly entrenched with proven domain knowledge, experience and

credentials, IVRCL operates in the following infrastructure sectors:

Water & Environment

Transportation

Buildings

Power

Milestones in the making of a giant

Commercial operations since 1990

Established itself as a premier EPC & LSTK Service Provider with front-endengineering capabilities in 1990

Achieved Group turnover of 1 Billion USD in less than two decades of ouroperations

Foray into BOT/BOOT/DBOOT projects since 2001

Achieved a Turnover of around Rs. 37000 million / USD 900 million and a net

worth of Rs. 16000 million / USD 400 million in less than two decades of our operations.

SWOT ANALYSIS

Strengths

Diversified order book:NCC has diversified order book with presence across multiple

verticals. This provides a unique hedge to the company in case of slowdown in orders

from any particular segment.

Working capital cycle: Construction is a working capital intensive industry. It should benoted that NCC has one of the best working capital cycle in the industry after Simplex

Infrastructure.

Healthy share of private contracts: Higher share of private contracts ensue higher

margins as they are bagged on a negotiated basis. Private contracts also allow betterworking capital management.

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Weakness

Slowdown in international operations: The recent slowdown in the construction

activity in Middle East markets may impact the top-line of the company in the near term.

Exposure to Andhra Pradesh: Although the exposure to Andhra Pradesh is just 10% of

the order book, (immaterial) the company faces execution issues haunting top-line.

Opportunities

New divisions:New divisions present a great opportunity for the company to cash in onthe incremental business.

Transportation:NCC revenue share from the transportation segment has witnessed a

secular decline from FY06. Considering the recent policy thrust on infrastructure and

roads in particular, (the government plans to award highway projects in range of Rs 350bn over the next 3 years) NCC has enough headroom to tap in on this laggard business.

ThreatsCompetition: The industry operates at wafer thin margins. Unviable bidding by

competitors in order to just gain an entry into the business can impact the top-line of thecompany.

Weaker government finance: Weaker government finances can impact the order

inflows of the company