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 airport development. The construction sector has registered double digit growth during the last few years and its share as a percentage of GDP has increased considerably as compared to the last decade. The Planning Commission of India has proposed an investment of around US$ 1 trillion in the Twelfth five-year plan (2012-2017), which is double of that in the Eleventh five-year plan.
	From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. During the first two years of the eleventh five-year plan (2007-2012), the share of private players in the total investment was 34%. This is higher than the target of 30% for the eleventh five-year plan. During the twelfth five-year plan, the contribution of private sector in total infrastructure investment is expected to increase to 50%. The balance will be borne by the public sector.
	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 sector has with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, timber and building material are dependent on the construction industry. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.

Key Points Supply Past 4-5 years have seen 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 mainly 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 the number of contractors and construction service providers, margins have been stagnant despite strong growth in volumes. Bargaining power of customers Low. The country still lacks adequate infrastructure facilities and citizens have to pay for using public services. Competition Very high across segments like road construction, housing and urban infrastructure development. Relatively less in airport and port development.

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Financial Year '11 After a slow growth in the last fiscal, order inflows in the construction industry registered a healthy growth in FY11. However, it was not reflected in the revenues and profitability due to execution delays and rising cost of construction. Nevertheless, considering the strong order backlog, the next fiscal could be promising provided execution remains on track. The 2011-12 Budget saw increase in allocation towards various infrastructure development schemes. The government earmarked Rs 2 trillion for infrastructure development as a whole. This is an increase of 23.3% over 2010-11. The government also increased FII limit for investment in corporate bonds issued in the infrastructure sector to US$ 25 bn from US$ 5 bn. Backed by government’s sustained focus on housing, road, port and airport development, infrastructure sector in India is poised to grow. The first half of FY11 proved favorable for the real estate companies. The global economy improved, bringing back financial confidence to the home buyers along with low interest rates. As demand for houses mounted, developers increased the prices. Prices went up to pre-2008 levels and in some cases beyond that. However, the situation has changed since 4QFY11. Rising inflation forced the Reserve Bank of India to hike interest rates. High interest rates and high property prices started denting demand for real estate. The real estate companies are reeling under heavy debt and rising costs (both operating expenses and interest costs). Nevertheless, as genuine demand exists for good quality homes, long-term fundamentals for real estate sector remains strong.

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Prospects India is on the verge of witnessing a sustained growth in infrastructure buildup. Infrastructure investments continue to be the most important growth driver for construction companies. The proposed increase in allocation in the twelfth five-year plan (2012-2017) will translate into a healthy business for construction companies. Real estate investments account for majority of the total construction investments. Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. According to the Technical Group on Estimation of Housing Shortage estimates, there would be shortage of 26.53 m houses during the Eleventh Five Year Plan (2007-12), which provides a big investment opportunity. In addition to this, demand for office space from IT/KPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, boom in organized retail is expected to result in huge demand for real estate construction. While long-term factors are likely to work in favour of the real estate developers, the outlook for the short term remains bleak. The double whammy of plunging sales and rising costs have taken their toll on the profitability of real estate majors. Also, banks turned cautious towards rescheduling debt or issuing fresh loans to real estate companies, as an aftermath of the bribe-for-loan scam. Prices of steel, cement and labor, which together make for almost 75% of overall construction cost, have risen by over 30% since 2009. Upward spiraling cost of construction materials has put great pressure on project execution, in turn leading to project delays. Entry into affordable housing is likely to pressurize margins but would arrest the free fall in topline as witnessed during the downturn.

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Views Research Reports: Construction Sector | All companies