X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Construction: Building India! - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 27, 2006

    Construction: Building India!

    World-class infrastructure has emerged as a fuel to power long-term and sustainable growth of economies, especially emerging economies, which are witnessing faster growth in demand for infrastructure and construction services. As far as the Indian economy is concerned, while the populace have been deprived of even a decent infrastructure setup (due to government's slackness), what we are witnessing now is a kind of a revolution as far as the changes taking place in the industry are concerned.

    The construction industry received a fillip beginning FY03, with the government showing increased focus towards developing a strong and sound infrastructure setup in the country. In India, the construction industry is the second largest economic activity after agriculture, estimated to grow at an average rate of 9.5% during FY02 to FY06, against 8.6% average growth for the services sector. The availability of the cheap labour makes the industry largely labour-intensive. The industry is not fixed capital intensive; it is working capital intensive in terms of the gross working capital requirements. The initial gross working capital requirement depends on the type of projects (road projects have lesser working capital requirements as compared with building projects).

    The construction sector forms around 12.8% of the GDP and 52% of gross fixed capital formation. Investments in the sector have a domino effect on supplier industries there by giving a way to economic development and futher leading to the growth of the other sub-industries, which are dependent on this sector (like cement, steel and chemicals). Interestingly, the industry supports 32 upstream industries and 72 downstream industries.

    Of changing times…
    In the past, private sector participation in most of the infrastructure projects was nil, or minimal. The government used to dominate this segment. However, times have been changing with the government now focusing greater on a private public partnership model (PPP) for infrastructure creation. This has seen a host of private sector constriction players investing in the sector, mainly through the BOT model (Build-Operate-Transfer).

    In the BOT model, which is basically used in road construction, the private firm builds and operates a toll road till it recovers the investments and earns a profit. This is a typical BOT contract. Another type of BOT contact is based on annuity, wherein the concessionaire (private party) gets a fixed amount annually from the government to recover his investment up to the agreed concession period. In this case, the government does the toll collection. One of the best examples of PPP based BOT model in India is the planned upgradation of the New Delhi and Mumbai airports.

    Roads are, however, the biggest of India's PPP infrastructure projects. Indeed, among other projects, roads have evinced maximum interest and optimism among private players for PPP. Even the government has outlined some policy initiatives in order to attract private investments in road infrastructure projects. As per National Highways Authority of India (NHAI), some of these incentives are:

    • Government will carry out all preparatory work including land acquisition and utility removal. Right of way to be made available to concessionaires free from all encumbrances.

    • NHAI/Government of India to provide capital grant up to 40% of project cost to enhance viability on a case-to-case basis.

    • 100% tax exemption for 10 years.

    • Concession period allowed up to 30 years.

    • In BOT projects, the entrepreneur is allowed to collect and retain tolls.

    • Duty free import of specified modern high capacity equipment for highway construction.

    As per the NHAI, over the next ten years, about 32,000 km of national and 25,000 km of state highways need to be widened, at a cost of some Rs 1,700 bn, and highway maintenance will require over Rs 950 bn. NHAI is also preparing the four-laning of 10,000 km of national highways outside NHDP (National Highway Development Program). The current thinking suggests that most sections would be toll-based BOT, with less viable routes awarded through cash contracts or annuities. Public support will be capped at 40% of project cost (25% during construction and 15% over the concession period). The future of companies in this business thus appears bright. Project execution skills and scalability, will however be very critical in the differentiating successful companies from the rest.

    Growth is also expected in other segments of the construction sector, more importantly in real estate, where easy availability of home loans, low interest rate and demographic factors have led to higher demand for better quality housing.

    According to the latest economic survey, India has the potential to absorb US$ 150 bn of foreign direct investment in the next five years in the infrastructure sector alone, of which a large part is expected to go towards construction activities (both road and housing development). Considering the present rate of growth and the untapped demand of better housing and road from the semi-urban and rural areas, we believe that contribution from the construction sector to the GDP shall rise further in the future. Importantly, the government is showing the way!

     

     

    Equitymaster requests your view! Post a comment on "Construction: Building India!". Click here!

      
     

    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE REALTY


    Aug 21, 2017 (Close)

    S&P BSE REALTY 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS