BELGAUM INSTITUTE OF MANAGEMENT STUDIES

(BIMS)

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

INDUSTRY ANALYSIS
ON
(DLF LTD.)
Submitted To:
Prof. Prasanna Kulkarni

Submitted By:
Miss. Zeba Bidikar
Roll No.: 65 “B”
MBA III Sem, BIMS
Industry Analysis:
Industry Overview
Today, India is the second fastest growing economy in the world. The Indian
construction industry is an integral part of the economy and a conduit for a substantial part of its
development investment, is poised for growth on account of industrialization, urbanization,
economic development and people's rising expectations for improved quality of living.
In India, construction is the second largest economic activity after agriculture.
Construction accounts for nearly 65 per cent of the total investment in infrastructure and is
expected to be the biggest beneficiary of the surge in infrastructure investment over the next five
years. Investment in construction accounts for nearly 11 per cent of India’s Gross Domestic
Product (GDP). €239.68 billion is likely to be invested in the infrastructure sector over the next
five to 10 years - in power, roads, bridges, city infrastructure, ports, airports,
telecommunications, which would provide a huge boost to the construction industry as a whole.
Investment into this sector could go up to €93.36 billion by FY2010. With such bullish
prospects in infrastructure, affiliated industries such as cement are on a high. Cement
consumption, for the first time, is set to exceed the 150-million tonne mark. Reflecting the
demand for the commodity, capacity utilisation rose to over 100 per cent to touch 102 per cent in
January 2007 with despatches touching 14.10 million tonnes as against the production of 14
million tonnes. As opportunities in the sector continue to come to the fore, foreign direct
investment has been moving upwards. The real estate and construction sectors received FDI of
€216.53 million in the first half of the current fiscal year.

Industry Segments
REAL ESTATE
• Residential (Housing & Development)
• Industrial (Industrial Parks, Factories, Plants, etc.)
• Corporate (Office, Research Centres)
• Commercial (Retail: Malls, Shops, Showrooms; Hotels; etc. )

INFRASTRUCTURE
• Roads
• Railways
• Urban infrastructure (improved housing, watersupply and sanitation, schools,
universities, health and security, etc.)
• Ports
• Airports
• Power

The real estate and construction sectors combined make up one of the largest business segments
in the U.S. economy and throughout the world. This is also a very cyclical sector, extremely
dependent upon outside factors including interest rates, employment rates, new household
formation, general economic growth and stable lending and credit markets. Among the most
exciting real estate markets for the midterm are China, India and Brazil.

Technologies and online services of many types have been rapidly affecting the real estate,
mortgage and construction sectors. In particular, millions of home buyers and Realtors are using
new Internet based research and marketing tools.

National government investments in transportation infrastructure such as highways, education

facilities, government offices and health care facilities will offer opportunities to commercial
construction firms. A large portion of national government “stimulus” construction spending will
be funneled to state and local projects.

A Brief History

The evolution of Indian Construction Industry was almost similar to the construction industry
evolution in other countries : founded by Government and slowly taken over by enterprises.
After independence the need for industrial and infrastructural developments in India laid the
foundation stone of construction, architectural and engineering services.

The period from 1950 to mid 60’s witnessed the government playing an active role in the
development of these services and most of 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 per cent 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 Transportation and Engineering Services (RITES), Engineers India
Limited (EIL), etc.) and private sector (M N Dastur and Co., Hindustan Construction Company
(HCC), Ansals, etc.).

In the late 1960s government started encouraging foreign collaborations in these services. The
Guidelines for Foreign Collaboration, first issued in 1968, stated that local consultant would be
the prime contractor in such collaboration.

The objective of such an imposition was to develop local design capabilities parallel with the
inflow of imported technology and skills. This measure encouraged international construction
and consultancy organisations to set up joint ventures and register their presence in India.

In India Construction has accounted for around 40 per cent of the development investment
during the past 50 years. Around 16 per cent of the nation's working population depends on
construction for its livelihood. The Indian construction industry employs over 3 crore people and
creates assets worth over  20,000 crore.

It contributes more than 5 per cent to the nation's GDP and 78 per cent to the gross capital
formation. Total capital expenditure of state and central govt. will be touching  8,02,087 crores
in 2011-12 from  1,43,587 crores (1999-2000).

The share of the Indian construction sector In total gross capital formation (GCF) came down
from 60 per cent in 1970-71 to 34 per cent in 1990-91. Thereafter, it increased to 48 per cent in
1993-94 and stood at 44 per cent in 1999-2000. In the 21 st century, there has been an increase in
the share of the construction sector in GDP and capital formation.

GDP from Construction at factor cost (at current prices) increased to  1,74,571 crores (12.02%
of the total GDP ) in 2004-05 from  1,16,238 crores (10.39% of the total GDP) in 2000-01.

The main reason for this is the increasing emphasis on involving the private sector infrastructure
development through public-private partnerships and mechanisms like build-operate-transfer
(BOT), private sector investment has not reached the expected levels.
The Indian construction industry comprises 200 firms in the corporate sector. In addition to these
firms, there are about 1,20,000 class A contractors registered with various government
construction bodies. There are thousands of small contractors, which compete for small jobs or
work as sub-contractors of prime or other contractors. Total sales of construction industry have
reached  42,885.38 crores in 2004 05 from  21,451.9 crores in 2000-01.

Factors that affect growth:

PEST Analysis

POLITICAL FACTORS.

 SEZ Act to Boost Infrastructural Development

SEZ is the new destination for real estate investors. Currently 150 SEZs are approved out
of which 85 SEZs are in the IT/ITES area and 10-15 SEZs in the electronics area.130 SEZs are
developed by real estate developers which constitute of about 50% of the total SEZ area. IT SEZ
should be developed and made operational within the period of six months from the date of
notification. Thus, 130 approved SEZs would result in investment of US$10 bn to US$ 12 bn
immediately.

 Cement Prices Reduced for State Infrastructure Projects

The continued thrust on infrastructure development will provide impetus to the healthy
growth in demand, protecting the bottomline of cement companies to an extent. The reduction in
the CST and in freight rates on diesel and limestone will be marginally positive for some
companies.

 FDI Liberalization to Augment Industry Growth

Recent amendments by the government have made accessibility to the required capital
much easier. Opening of FDI in construction and allowing developers to raise capital in
international markets has led to developments of larger projects benchmarked against
international standard.

 REITs to Positively Affect Real Estate Business

The proposed introduction of REMF (Real Estate Mutual Fund) and REIT (Real estate
Investment Trust) will boost real estate investments from the small investor’s point of view. This
will allow small investors to enter real estate market with contribution as less than Rs 10,000.
The concept of REIT is on the verge of entering India and would be structured as a company
dedicated to owning and in most cases operating income producing real estate such as
apartments, shopping centers, offices & warehouses.

ECONOMIC FACTORS.

 Growth in Construction Activity Stimulating GDP Growth

India is witnessing tremendous growth & expansion of construction activities and

construction is largest component of GDP. It has been growing at a rate over 10% in the past few
years when GDP growth is around 8%.Within construction; sectors such as roads, railways,
housing and power have been keen drivers.

 Rate Hikes Unlikely To Slow Down Growth

It has been analyzed that residential prices have increased by about 15- 20% on average
in the last one year. There has been strong growth in demand supported by rising disposable
incomes, low interest rates, and fiscal incentives on both interest and principal payments and
increasing urbanization.

SOCIAL FACTORS.

 Shifting Consumption Pattern to Fuel Industry Growth

The consumption pattern of Indian households is undergoing a gradual, but steady

change. The share of food and beverages, which used to constitute almost 50% of household
spend until 2003 is expected to fall to 45% by FY08. We expect the share of discretionary items
to consistently rise given the rising affordability and changing aspiration levels. Increased
exposure to western lifestyles (through media as well as overseas travels) has altered the
consumption pattern of Indian people.

 Rising Urbanization to Boost Industrial Growth

Urban infrastructure consists of drinking water, sanitation, sewage systems, electricity

and gas distribution, urban transport, primary health services, and environmental regulation.
Many of these services are in the nature of ‘local’ public goods with the benefits from improved
urban infrastructure. The urban population in India will grow by 85 million over the next 10
years.

 Green buildings in India

The Platinum rating for green building has sensitized the stakeholders of construction
industry. There is tremendous potential for construction of green buildings in India. The
estimated market potential for green building will be about $ 400 million in 2010.There will be
favorable policies of the government would provide the right impetus for advancing the green
building movement in India.

TECHNOLOGICAL FACTORS.

 Low Technology Adoption to Hinder Growth

The poor state of technology adopted by the construction sector adversely affects its
performance. Upgrading of technology is required both in the manufacturing of construction
material and in construction activities. As a large number of construction materials are
manufactured in the unorganized sector, effective monitoring and regulation of the production of
these materials to ensure proper quality becomes difficult. Use of low-grade technology in the
construction sector leads to low value addition and low productivity, apart from poor or sub-
standard quality of construction and time overruns in projects. The non-availability of quality
construction tools is the main reason for this. Besides, the construction sector also lacks
information about new technology.
 Construction as per Indian Requirements

The construction needs to be done as per Indian standards and requirements which will
demand considerable changes from the international requirements. The infrastructure
requirements of India are much different as the population spread, increasing urbanization,
increasing slums, the small space for roads, the water problems are more.

 Ready-Mix–Concrete Being Experimented With.

The Ready mix concrete business in India is in its infancy. For example, 70% of cement
produced in a developed country like Japan is used by Ready Mix concrete business there. Here
in India, Ready Mix concrete business uses around 2% of total cement production.

Much of construction done in India is very slow paced. The concrete making process at
site takes much time with variation in quality. The increasing use of ready mix not only saves on
time but allows the better quality. It will also eliminate the storage space at site, eliminate
Procurement / Hiring of plant and machinery, reduce wastages of basic material, noise and dust
at site will be reduced. Also organization at site will be streamlined. This will improve the rate at
which infrastructure can be built in India.

Government regulations:

A construction project must fit into the legal framework governing the property. These
include governmental regulations on the use of property, and obligations that are created in the
process of construction.

Building and Other Construction Workers (Regulation of Employment and Conditions of

Service) Act, 1996 regulate the employment and conditions of service of building and other
construction workers and to provide for their safety, health and welfare measures and for other
matters connected therewith or incidental thereto.

The Building & Other Construction Workers’ Welfare Cess Act of 1996 provides for the
levy and collection of a cess on the cost of construction incurred by employers with a view to
augment the resources of the Building & Other Construction Workers’ Welfare Boards
constituted under the Building & Other Construction Workers (Regulation of Employment and
Conditions of Service) Act, 1996. It extends to the whole of India and came into force on the 3rd
day of November, 1995.

Many construction projects are subject to disputes. In fact according to CIDC estimates,
the capital blocked in disputes is in excess of 540 billion. Till enactment of Arbitration &
conciliation act 1996, the process of dispute resolution was totally ad hoc. Act provided the
institutional arbitration helps to provide effective framework for dispute resolution. The other
laws and acts such as Contract act, transfer of property act etc. which are applicable to industries
need to be followed.

A construction project is a complex net of contracts and other legal obligations, each of
which must be carefully considered. A contract is the exchange of a set of obligations between
two or more parties, but it is not so simple a matter as trying to get the other side to agree to as
much as possible in exchange for as little as possible. CIDC data has shown that about 500
billion worth of contracts are subject to disputes.

Leading companies in the industry:

Top Players in the Real Estate & Construction industry
Company Sales
Turnover 
(2009, US$
million)
Unitech 784
DLF Ltd. 590
HDIL 286
Ansal 190
Properties
Source: Capitaline, Business Press

Industry life cycle, Age of the industry, stage of the industry in the industry
life cycle and industry’s life expectancy.
 (Industry Life Cycle: Early Stages, Innovation, cost or shakeout,
maturity and Decline):
The construction industry comprises establishments that are primarily engaged in the
construction of buildings or engineering projects (e.g., highways and utility systems). This may
include new work, additions, alterations, or maintenance and repairs. The construction industry
is divided into three major sectors.
 The first is the construction industry (both residential and nonresidential).
 The second involves heavy and civil engineering construction such as utility systems ,
land subdivision, and highways, streets, and bridges. Firms in these first two sectors are
primarily engaged in contracts that include responsibility for all aspects of individual
projects and are commonly know as general contractors.
 The third major sector of the construction industry includes establishments in the
specialty trades, which are primarily engaged in activities to produce a specific
component (e.g. masonry, painting, and electrical work) of a project.

 Life cycle position

The construction industry is the second largest industry of the country after agriculture.
Construction activity is an integral part of a country’s infrastructure and industrial development.
It includes hospitals, schools, townships, offices, houses and other buildings; urban infrastructure
(including water supply, sewerage, drainage); highways, roads, ports, railways, airports; power
systems; irrigation and agriculture systems; telecommunications etc.
It is in growth phase and offers massive development opportunities.

 Business cycle
CRISIL Research expects construction industry margins to remain stable in the medium term.
The stability in margins emanates from the trend expected in the construction industry's turnover
mix. The increasing share of high margin segments such as urban infrastructure and industrial
segment in the turnover mix will mitigate the negative impact on margins caused by declining
share of power segment.
 Industry Trends, Statistics:

1. Size of the industry (total sales), growth in size of the industry for last 5
years:

SIZE

o Real Estate and Construction is a US$16-billion (2009) industry in India

o There has been a rapid growth in the industry in the past few years
o Real estate share in total FDI increased from 10% in 2007-08 to over 25% in 2008-09
(estimated at over US$5 billion)
o High-demand growth has led to prices doubling over 3 years in many cities

Income, Sales, PAT, Current Ratio and Debt Equity Ratio of

Industry (88 companies) last 10 years
  Rs. Crore Rs. Crore Rs. Crore Times Times
  Income  Sales PAT  Current ratio  Debt equity ratio
Year Infrastructural Infrastructural Infrastructural Infrastructural Infrastructural
construction construction construction construction construction
Dec-02 5198.8 4877.16 122.01 1.36 2.85
Dec-03 79-32.14 7489.7 183.81 1.34 3.13
Dec-04 5699.93 5342.63 104.62 1.28 3.28
Dec-05 7130.77 6725.6 279.12 1.29 2.87
Dec-06 11238.19 10577.34 645 1.68 2.14
Dec-07 17315.35 15677.43 1378.31 1.93 1.96
Dec-08 25416.53 22855.85 1706.36 1.66 1.68
Dec-09 33226.37 30731.84 2584.72 1.66 1.68

2. Market shares of the companies:

Market Cap, Book value and PE of Industry (88 companies) last
10 year
 
  Rs. Crore Rs. Crore Rs. Crore Times
  Traded Volume Market Cap BookValue PE

Year Infrastructural Infrastructural Infrastructural Infrastructural

construction construction construction construction
 Dec-00 1.13 1922.52 584.6 15.61
Dec-01 0.47 1197.41 758.83 8.13
Dec-02 0.2 957.97 858.88 3.97
Dec-03 0.3 1235.82 1043.17 3.92
Dec-04 12.64 3658.39 1163.82 13.63
Dec-05 9.5 9579.48 2856.35 19.96
Dec-06 99.6 22098.15 3921.33 25.14
Dec-07 202.25 49024.59 10098.8 48.9
Dec-08 251.61 123355.66 15544.85 65.87
Dec-09 96.29 29588.57 20754.65 11.72

3. Installed capacity of the industry, growth in installed capacity of the

industry for last 5 years and proposed capacity addition by companies
in this industry.
Installed Capacity:

In India Construction has accounted for around 40 per cent of the development
investment during the past 50 years. Around 16 per cent of the nation's working population
depends on construction for its livelihood. The Indian construction industry employs over 3 crore
people and creates assets worth over  20,000 crore.

It contributes more than 5 per cent to the nation's GDP and 78 per cent to the
gross capital formation. Total capital expenditure of state and central govt. will be touching 
8,02,087 crores in 2011-12 from  1,43,587 crores (2008-09).

GDP from Construction at factor cost (at current prices) increased to  1,74,571 crores
(12.02% of the total GDP ) in 2008-09 from  1,16,238 crores (10.39% of the total GDP) in
2004-05.

The Indian construction industry comprises 200 firms in the corporate sector. In addition
to these firms, there are about 1,20,000 class A contractors registered with various government
construction bodies. There are thousands of small contractors, which compete for small jobs or
work as sub-contractors of prime or other contractors. Total sales of construction industry have
reached  42,885.38 crores in 20007-08 from  21,451.9 crores in 2008-09.

Growth potential
 India is currently the second fastest-growing economy in the World. The Indian
construction industry has been playing a vital role in overall economic development of the
country, growing at over 20% Compound Annual Growth Rate (CAGR) over the past 5 years
and contributing 8% to GDP. In 2009, the sector generated around 31 million jobs (of which
only 1 million were generated by the organized sector).
With the growing quantum of domestic and international capital inflow, economic
growth is likely to continue, and with it, the demand for infrastructure to maintain and accelerate
this trajectory. As a result, the public sector has remained a big investor in this sector, given the
acute shortage of infrastructure in India compared to the requisite level required to achieve the
next growth target.
The Government of India proposes to achieve 9.0% GDP growth during the Eleventh
Plan period. To achieve growth of this scale, adequate infrastructure is the most basic
requirement. In order to overcome the current constraint of insufficient modern infrastructure,
the government is developing a program for infrastructure investment through both public and
private sectors, and expects to more than double public investments from 1.2% of GDP in FY07
to 2.8% by FY12. It is also partnering with private companies on initiatives such as the ultra
mega power projects and Golden Quadrilateral project.

Future prospects
Taking cue from the Government’s ambitious projects lined up for the Eleventh Plan
period, the demand for construction is expected to grow by at least 8-9%, and 2.5 million
employment opportunities per annum are expected to be generated. Those looking for
opportunities for accelerated learning and progress would be rewarded heavily.
There is a need for the full spectrum of employees from directly linked professionals like
civil and mechanical engineers and architects to per-day wage construction workers and
indirectly linked industrial workers such as steel and cement manufacturers to highway toll
booth operators. It would be wise to join a leading.
Indian company, or a multi-national with a local presence, even at the starting level, as
there is significant scope for training and rapid upward movement through the ranks for talented
individuals.
4. Capacity share of the companies:

Segment-wise Distribution:

Construction companies undertake construction of real estate and infrastructure projects.

Real estate involves construction of buildings, townships, commercial spaces, malls, and
retail outlets. Infrastructure projects include construction of turnkey projects of national
importance such as roads, bridges, highways, railways, airports, dams, among others.
Most of the companies deals in the construction of residential buildings.

5. New companies planning to enter this industry and their proposed

capacities.
 Entering new markets-top priority for construction companies

Most companies in the infrastructure sector are presently consciously undertaking projects
on a PPP basis, for directing synergies of private companies and government companies. Most
companies dealing in building residential buildings are planning to enter new markets. Airport
development companies are inclined more towards JVs/ alliances for their future expansion.

6. Classification of profitable and loss making companies.

Profit Making Companies:
Companies Net
profit
Larsen & Toubro 4,375.52
DLF Ltd 765.06
Gammon India Ltd 144.79
HCC Ltd 81.44
Unitech Ltd 544.3
Sobha Developers 136.7
Ltd.
Nagarjuna 232.62
Construction Ltd.
 Net profit

Larsen & Toubro

DLF Ltd
Gammon India Ltd
HCC Ltd
Unitech Ltd
Sobha Developers Ltd.
Nagarjuna Construction
Ltd.

7. Top five companies in terms of sales, profits, growth in sales, growth in

profits and growth in market capitalization:
Company performance

A strong top line performance can be seen across majority of construction companies.31
out of 51 companies in the CMIE sample recorded over25% growth in sales. Around 59% of
companies in CME samples recorded as expansion of over 130 basis points in net margins in
June 2009.
The sectoral index recorded a healthy 12.7% returns and posted excess gains of 7.4% vis-
à-vis the Overall share price index. Reckoned month-on-month, about 70% of companies posted
positive returns.
L&T the largest company by market capitalization continued its upswing. The scrip
touched 52 week high of Rs. 2735 on 24 July 2009 and was up 18.7 % during the month. L&T
registered a 30% rise in revenues to Rs. 4505 crore during June 2009 quarter.
Mkt. Returns No. of shares Trading P/E Beta
cap ( %) traded volume (Times)
(Rs. (Lakh nos.) (Rs.
Crore) Crore)
L&T 74108 18.7 247.0 6039.8 45.7 0.98
Jaiprakash 18239 13.1 245.6 2020.5 39.4 1.36
Aban Offshore 11168 0.4 21.8 672.4 109.0 0.85
Punj Lloyd 7417 10.5 407.1 1118.3 124.5
 Lanco 5327 16.4 410.6 957.7 64.9
Infratech
Apil 5205 -2.6 85.8 711.3 45.1 1.31
IVCRL 5012 7.5 540.8 2129.3 31.5 1.43
Nagarjuna 3999 7.8 360.5 710.3 23.5 1.51
Gammon India 3858 7.2 58.6 129.7 35.8 0.87
HCC 3562 12.8 420.5 547.4 36.4 1.45
Construction 160686 12.7 3712.3 17042.3 42.2 1.17
Industry
Source: Indian Industry a monthly review: CMIE (July 2009)

Competitor Ratio Comparison:

Company Return on Assets Return on Equity

Larsen & Toubro 7.22 37.69
HCC 2.64 3.77
Jaiprakash associates - -
Gammon India 4.15 3.07
IVRCL Infrastructure 5.43 14.00
Nagarjuna Construction 6.25 9.84
Patel Engineering 6.00 23.32
Simplex Infrastructure 5.86 21.10
Ratio data as of 03/31/2009

Stock market Performance:

 Larsen & Toubro

Assuming that you bought this stock at the closing price on 01-02-2005 on the
BSE, your gain on 31-01-08 is 654.42%. If you had bought on the NSE, your gain would
be 653.42%.
  Jaiprakash Associates

Assuming that you bought this stock at the closing price on 01-02-2005 on the BSE, your
gain on 31-01-08 is 884.43%. If you had bought on the NSE, your gain would be 883.16%.

 Hindustan Construction Company

Assuming that you bought this stock at the closing price on 01-02-2005 on the BSE, your
gain on 31-01-08 is 382.86%. If you had bought on the NSE, your gain would be 383.1%.

 Gammon India

Assuming that you bought this stock at the closing price on 01-02-2005 on the BSE, your
gain on 31-01-08 is 268.89%. If you had bought on the NSE, your gain would be 268.57%.
 8. Operating profit Margin and Net Profit Margin of Top five companies
and average OPM and NPM (March 2010):

Top Five Operating Net Profit Average Average

Companies Profit Margin(%) OPM NPM
Margin(%)
Larsen & Toubro 13 11.53 20.61 10.59
DLF Ltd. 46.1 23.76

Gammon India 9.32 3.2

Ltd.
HCC Ltd. 11.79 2.24

Sobha Developers 22.85 12.22

LTd.

Source: Rediff.moneywiz.com

9. Average ratio of costs to sales of profitable top 5 companies e.g

employee cost, raw material cost, transportation/freight cost.

Industry Developments, Innovations, & News:

Government Projects

The Central government and various state governments have initiated a number of schemes for
mass housing, infrastructure development projects, sanitation projects, water supply and
irrigation projects, and overall urban development. Some well known initiatives from the
government include JNNURM, SEZs, PMGSY, RGGVY, NHDP, SEZs, among others.
JNNURM has been initiated by the Indian government for planned urban development in cities;
NHDP is the National Highways Development Project that involves development, maintenance
and management of national highways. SEZs are geographical regions that have more liberal
economic laws and enjoy certain privileges conferred by the government.

According to the study, approximately 37% of the sample companies have undertaken projects
under the NHDP scheme initiated by the government and approximately 34% companies have
undertaken projects under the SEZ scheme initiated by the government.

New Projects

Private equity fund IL&FS Investment Managers (IIML) plans to invest US$ 300 million in real
estate and urban infrastructure projects by the end of 2010.

Godrej Group's real estate company, Godrej Properties and Frontier Home Developers, plans to
develop a residential project in Gurgaon. This would be the first residential project in the
national capital region (NCR) for Godrej Properties.

Shristi Infrastructure Development Corporation will invest US$ 444.7 million over the next three
years in seven small cities in West Bengal, Tripura and Rajasthan. The money would be used to
build integrated townships, healthcare facilities, hospitality and sports facilities, retail malls,
logistics hubs and commercial and residential complexes.

Realty major Ansal Properties & Infrastructure Ltd plans to invest about US$ 330.8 million over
the next three years on expansion of its existing integrated townships and to develop a group
housing project in Haryana.
Integrated property development and asset management company, Vision India Real Estate Pvt
Ltd, is planning to develop logistics parks in Bengaluru and Chennai, with an outlay of US$ 110
million.

Tata Housing is planning to launch about 10 new residential projects in both affordable and
luxury segments in 2010-11, with an investment of about US$ 268.9 million along with its
partners.

Vision India Real Estate, a closely-held business group in the US, is investing US$ 5 million in
Gem Group’s upcoming residential project in Chennai. This will be the first joint development
project for the US company that is proposing to invest US$ 100 to US$ 200 million over the next
three years on projects, especially in the logistics arena.

Joint Ventures

Construction companies have entered a number of JVs and collaborations for undertaking
various projects. Construction companies enter partnerships with domestic and international
construction companies for expanding into new regions, new segments, and also enter
technological collaborations for completion of projects. Companies come together to form
SPVs to execute projects on BOT, BOOT basis.

Approximately 60% of the companies have entered JVs of various forms for execution of
projects. Generally, companies carrying out construction of townships prefer the JV route for
execution of projects.

Term loans, the most-preferred financing option

The construction sector is heavily dependent on finance and efficient resource management for
project execution, expansion, and diversification. Public limited companies are inclined towards
term-loan followed by internal accruals for expansion. Term-loan is one of the most preferred
financing options for expansion of capacity for the sample companies also, followed by internal
accruals.
Latest government regulations:

Government Initiatives:

The government has introduced many progressive measures to unlock the potential of the sector
and also to meet the increasing demand levels.

 100 per cent FDI allowed in townships, housing, built-up infrastructure and construction
development projects through the automatic route, subject to guidelines as prescribed by
DIPP
 100 per cent FDI is allowed under the automatic route in development of Special
Economic Zones (SEZ), subject to the provisions of Special Economic Zones Act 2005
and the SEZ Policy of the Department of Commerce
 FDI is not allowed in Real Estate Business
In the Union Budget 2010-11, the Finance Minister made the following announcements with
regard to the real estate sector:

 Allocation for urban development was increased by more than 75 per cent from US$
660.3 million to US$ 1.17 billion in 2010-11
 Allocation for housing and urban poverty alleviation was raised from US$ 183.4 million
to US$ 215.8 million in 2010-11
 Scheme of 1 per cent interest subvention on housing loan up to US$ 21,576 where the
cost of the house does not exceed US$ 43,153 announced in the last budget has been
extended up to March 31, 2011 and US$ 151 million has been earmarked for this scheme
for 2010-11
 US$ 274 million has been allocated for Rajiv Awas Yojna, as compared to US$ 32.4
million last year
 Meanwhile, the Reserve Bank of India (RBI) has revised the norms for urban cooperative
banks for giving loans to the housing and real estate (RE) segment. Now, urban banks
can use up to 15 per cent of deposits to provide housing, real estate and CRE loans.
Earlier, the RBI norm permitted them to use up to 15 per cent of deposits for giving
advances to housing loans and other block capital loans.

Expected government regulations:

Consumer Market data:
Size of Indian Household by Profile (Millions)

Class 2006-09 2002-06 1997-01

Rich 5.2 2.6 1.2
Middle Class 75.5 46.4 32.5
Aspiring 81.7 74.4 54.1
Road Ahead

According to the Confederation of Real Estate Developers' Associations of India (CREDAI), the
affordable housing segment is set to play an important role in India's real estate sector in 2010 on
the back of substantial demand.

"Affordable housing will be a key factor in driving the sector and we have already started
working on progressive solutions in this area for effective and customised implementation of
such projects," Confederation of Real Estate Developers' Associations of India (CREDAI)
Chairman Kumar Gera said in January 2010.

Moreover, 2010 is expected to be a positive year for the real estate sector. The revival is
expected to be driven by infrastructure growth, which in turn, can accelerate real estate activities
both in the residential as well as commercial spaces.

KEY DRIVERS

 Booming Indian economy

Over past few years, the Indian economy continued on its robust growth path with the
overall growth in real gross domestic product at factor cost estimated at 9.4 per cent (in 2007-
08). India was the second highest contributor to world growth in 2007. Sustained high growth
over the last four years has made India the third largest economy after USA and China with its
share in world GDP rising from 5.5 per cent in 2005 to 6.4 per cent in 2009.

The strong growth prospects of the Indian economy, high returns on equity and higher
interest rates coupled with rise in global private capital flows, have resulted in hue growth of
construction industry.

 Growing housing and commercial space requirements

The housing needs of urban population are increasing day by day. Urbanization of India
is important factor in this. Many industries are expanding to many cities beyond metros like
Mumbai, Delhi etc. Many foreign industries are setting their plants in not so developed parts of
India.
 The urbanization of population rise of incomes levels, middle income groups has shown
huge interest in Commercial malls, multiplexes, organized retail which has given a boost to
construction industry. The mall space construction has shown substantial which can be seen from
the graph.

200

144

87
54
16 22
2 7

2002 2003 2004 2005 2006 2007 2008 2009

 Govt. thrust on infrastructure, Government projects, initiatives etc.

Sustenance of growth is fully contingent on the creation of supportive infrastructure.

Hence the Government has been employing innovative options to develop infrastructure. Airport
modernization projects, Construction of roads bridges water supply projects and many other
government initiatives provided boost for construction industry.

 Rising Household Income

India’s household income is rising sharply. The new evolution of middle income groups
has supported the boom of construction industry. As a result of rising income and swelling
middle class, India’s per capita income has doubled over the past 20 years.  With population
growth of about 1.6% per annum and Gross Domestic Product (GDP), growth of 9% per annum,
the per capita income is expected to quadruple by the year 2020.

The average real income of urban India and rural India is likely to grow by 5.7% and
3.6% respectively by 2025.  Moreover, India’s middle class is expected to expand by more than
10 times from its current size of 50 million to 583 million people in next 18 years.
 Therefore, all these estimates work out to make a strong case for higher home loan GDP
ratio so that India and its population is able to keep a pace for meeting the demand for housing
units.

 Booming IT&ITES Sector

Almost 30-40 per cent of the land acquirers have been IT companies. Not only are new
companies looking at setting up shop, but the existing companies such as IBM and Microsoft are
also expanding.

The notable transactions in Bangalore include companies such as Microsoft and IBM
committing to lease approximately 1,00,000 sq. ft. and 2,00,000 sq. ft. space respectively. UL
India has leased approximately 20,000 sq. ft.; Desmet Chemford has leased around 16,000 sq. ft.
and Oracle around 10,000 sq. ft. of space.

The IT corridor along the Sarjapur Ring Road is also buzzing with activity, with
companies such as Intel purchasing 43 acres of land and Hughes Software signing for a 1,10,000
sq. ft. built-to-suit facility, with an option to expand.

The report said that Gurgaon still remained a preferred destination for corporates that
wanted space in Delhi. Some prominent transactions included the lease of approximately 51,000
sq. ft. by Hewlett-Packard in the Global Business Park, 36,000 sq. ft. by Convergys in Orchid
Square, 1,34,000 sq. ft. by Hewitt Associates in DLF Center Court and 8,500 sq. ft. by Louis
Berger.

The preference of IT & ITES companies for suburbs, due to availability of better quality
options at cheaper prices has led to an increase in demand for residential properties in these
areas. Thereafter, the emergence of good quality condominiums with additional amenities has
also fuelled the demand for residential properties. However, despite the increasing demand in
these areas, the prices will remain unaffected in the medium term, owing to the excess supply of
stock.

 Retail sector facilitating real estate growth

 Apart from the IT and ITES industry influencing the Indian real estate sector, India is
also getting into the knowledge based manufacturing industry on a large scale. Retail, one of
India's largest industries, has presently emerged as one of the most dynamic and fast paced
industries of our times with several players entering the market.

Another emerging trend is investment in the hospitality or hotel industry. The exceptional
boom in inbound tourism and the IT sector has also led to an unprecedented shortage of rooms,
with hotels all over the country witnessing their highest-ever occupancy rates.

 Changing Age Profile

As of 2004, about 53% of the population in the country is less than 25 years of age. This
compares favorably with China where the comparable number is 42%. According to Asian
Demographics Report, the 20-54 years age bracket is growing faster than the rest of the
population and will represent more than 50 % of the population in 2013.

 Lucrative Investment Alternatives

The field of Indian real estate has proved so lucrative that most of the Indian as well as
foreign companies namely: Global–RMZ, Godrej Properties, Emami, ETA Star, GE Commercial
Finance, JM Financials, India Bulls Real Puravankar, Reliance Industries Ltd (in Hotel
business), Ambuja Realty, Liberty International (a British property group), DCM Shriram etc.,
etc., have also jumped into this arena as the results of investment in Indian real estate extremely
overwhelming which showed fly by night fast multiplication of capital. Buy property in India is
also suitable for investors due to emerging new renting system. After buying a house, one gets a
well paying renter. A new, modern concept and a new thinking differs from others are making
unique in India.

Boom on Construction business are pressuring other associated business to change their
strategy and policies in favor this market. Bankers understand requirement of a new type of
investors, who want to invest in this, are providing home loan to customers on lower interest and
under lots of schemes, also providing customers subsidy home loan, even builders projects in
India also dependent on bankers and their schemes. Government is launching programs to attract
property buyers and appreciating investors to buy property in India.
 Impact of each of these factors when looked upon in isolation may not be significant, but
when viewed in totality they offer enormous potential for housing market growth. Rising income
levels in combination with a reduction in average population age has over the years resulted in
the fall of average age of a house buyer. Analyst expects the trend to sustain in due course of
time.

INDUSTRY OUTLOOK

The government’s commitments to infrastructure development, especially in the power

and road sectors, are likely to add further impetus to the industry’s growth.

One key trend that has been observed in past few years and growing is that foreign
companies have begun to enter India either on their own or as joint ventures with Indian
companies there are massive investments expected and it will be good for these companies to do
business in India.

Apart from this the foreign manpower is coming and working India. Recent case of
Reliance invited the Chinese workers to come and work in India and government permitted them
to do so.

Investment in human capital is required to improve the quality of labour. This must be
done through more training and certification institutes to augment the supply of skilled labour;
associating ITIs with training of construction workers; stipulating the widespread use of trained
labour as a prequalification condition for bidding. The percentages stipulated could be increased
over time.

Review of the procurement and dispute resolution mechanism must be carried out to
reduce the cost of construction so that infrastructure services could be provided at competitive
costs.
 Upgradation of technology is required to improve productivity and quality as also to
ensure the timely completion of projects.

In future there will be consciousness about environment safety and health standards.
This could result in problems of land acquisitions. The demand for the green construction, green
buildings will become large. The construction industry must be prepared to take the green
standards fast.

A lot of needs to be done on the part of the industry as a whole-that is, by the clients,
contractors, government departments, to improve the scenario.

Conclusion
Indian construction industry is poised to grow exponentially because of massive infrastructure
building programs. This has created excellent opportunities for the construction industry in terms
of business opportunity. The Indian economic environment and system and procedures would
further boost the construction industry which would provide the basic physical infrastructure for
the nation as well as other industries.
This poises several challenges for the Indian Construction Industry which have been highlighted
in this article. CIDC(Construction industry Development Council) is taking proactive measures
to meet this challenges an help the industry to excel.