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Indias fast paced economic growth in

recent years has put tremendous pressureon the physical infrastructure of thecountry, including power, roads, railways,ports, airports, irrigation, water supplyand sanitation, etc. With a directcorrelation between infrastructuredevelopment and economic growth, theimminent need now is to improve thephysical infrastructure of the country andthe government has accordinglyemphasized raising infrastructure

investments. The infrastructure spendingas percentage of GDP has grown to 7.5%

in FY10 (vs. 5.7% in FY2000 and 2.6% inFY1990). ).

Although Indias infrastructure spendingis comparable to other emergingcountries, India needs to speed up itsinfrastructure spending in order to cover

the infrastructure deficit and sustain its

long-term growth of 9%. In line with this,the government has targeted a sharpincrease in infra spending at 2.0x to US$514 billion (Rs 2,056,153 crore) in theXIth Plan. In the XIIth Five Year Plan,infrastructure spending is expected to rise2.3x to US$1,019 billion (Rs 4,074,978crore) indicating huge opportunities willsustain for construction players. Thepower sector has the largest share (32%)in infrastructure spending in the XIthPlan, followed by the roads sector (15%).The construction relevant spending is US$350 billion and US$697 billion (at anexchange rate of Rs 45/US$) in the XI-

XIIth Plans, respectively. (Source: ICICIDirect)

In addition, the construction sectorscontribution to GDP is on an upswing.The share has risen from 7.7% in FY05 to8.4% in 2QFY10 (below chart). WithGDP expected to grow at around 8.5-9%in the coming years, it is expected that thesectors growth momentum will continue.

Moreover, the ordering opportunity forconstruction players is pegged at US$109bn between FY10-12E. This is likely to bea result of acceleration in awarding

national highway projects as well asfastening growth in the power sector.

The expected contribution of varioussectors to the total orders is outlined asbelow:

Revenue growth

Economic slowdown and general electionsled to muted order inflows in H2FY09and H1FY10. Order inflows, however,have picked-up since H2FY10 (up 74%YoY). It is expected that these strong orderinflows would significantly boost revenues,with the year-on-year growth in revenuesfor the four largest construction sectorplayers estimated to be 16% for FY11.

Emergence of the private Sector

Historically, infrastructure development

(core sector) has been the domain of thepublic sector. Post liberalisation, the sectorwas opened for the private sector toparticipate.

Private sector investment grew manifold

An Overview of the Construction Sector

PanoramaFEBRUARY 2011 ISSUE EIGHT

Sector ReportPlayer profilesNews updates

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in the past decade and it assumed aposition of utmost importance. Theemergence of private sector ininfrastructure creation is reflected fromthe fact that the total private investmentin infrastructure was 30% higher than theGovernment estimates in the Xth FiveYear Plan. According to governmentestimates, private investments share willbe ~36% of total investments ininfrastructure in the XIth Five Year Plan,

and subsequently will rise to around 50%

in the XIIth plan. (Source Tata SecuritiesResearch)

Operating metrics

Almost all construction companies haveexhibited robust growth in their orderbook led by increased activity in theinfrastructure space. The order book sizeof all leading construction companies hasbecome 1.9-3.6x in the last five years.The order book to bill ratio has been atits peak for almost al l leading

construction companies indicating strongrevenue visibil ity, going ahead.Furthermore, since most of the orderinflow has flown in H2FY10, executionrate for construction companies shouldstart picking up in H2FY11 as H1 for thefinancial year is typically seasonally weakfor construction companies.

Bank credit to infrastructure growing at abrisk pace. Given the emphasis oninfrastructure development, credit to thesector has increased during the pastdecade with the share of incrementalinfrastructure credit in total industry

credit rising to 35% in FY09. The powersector has been the largest recipient ofcredit with a share of 16%. However,growth of incremental infrastructurecredit did slow down in FY09 at 5% to Rs

64,852 crore due to the globaleconomic slowdown (vs. 43% CAGR inFY04-09). Going ahead, bank lendingto infrastructure would remain a keyavenue.

The expansive outlay laid out for theXIth Plan (2007-12) is likely to be spentth rough var ious Governmentprogrammes--Bharat Nirman, ultramega power projects (UMPPs),

maritime development programme,NHDP programme, acceleratedirrigation scheme etc. This is likely tobe supported by an increase in thecorporate capex cycle and real estatedevelopment.

I n t e r m s o f i n f r a s t r u c t u r edevelopment, we expect power andtransportation, including roads andhighways to lead growth, with morethan 50% of the planned investmentbeing in these two sectors. In the XIthplan, more than 32% of the projectedinvestment relates to the power sectorspread between thermal, hydro andnuclear. We expect orders for 60GWof power capacity would be tenderedover the next three to four years,

entailing an investment of Rs2.5-3tn. Inthe transportation sector, we expectmajor order flows from the roads andhighways sector, primarily tendered bythe National Highway Authority of India(NHAI). NHAI is targeting to award over35,000kms of road projects over the nextfew years, with investments of ~Rs2.2tn.

Power Sector

The government has come up with plansto provide Power for all by 2012aiming to add 78.7GW and 100GW inthe XIth and 12th Five Year Plansrespectively. Of the latter the tenderingfor only about 43GW has been done tillnow. According to the estimates of CEA,another 60GW of power should betendered in the 3-4 years.

In the XIth plan about 32% of theprojects relate to power and are spreadacross Thermal, Hydro and Nuclear. The

share of construction spend for the powersector is estimated at Rs. 1330 bnaccording to a report by Tata Securities.Thermal Power in particular is expectedto attract huge investments.

Transportation Sector

The conceptualization of the GoldenQuadrilateral (GQ) followed by theNorth-South-East-West (NSEW) corridor

has provided an impetus to the RoadDevelopment Proogramme. Incorporatedto develop and upgrade the longneglected National Highways, NHDP isthe Flagship programme of NHAI.Besides NHDP, the government targetedinvestments in the road sector throughother programmes such as the PradhanMantri Gram Sadak Yojana (PMGSY)and the Special Accelerated RoadDevelopment Programme (SARDP-NE).According to a Tata Securities Researchreport, the constituents of the NHDP

plan are:

!Four-laning of the GoldenQuadrilateral and NS-EW Corridors(NHDP I & II).

!Four-laning of 12,109kms (NHDP-III).

!Two-laning with paved shoulders of20,000kms (NHDP-IV).

!Six-laning of 6,500kms (NHDP-V).

!Development of 1,000kms ofexpressways (NHDP-VI).

!Other highway projects of ~700kms(NHDP-VII).

!Accelerated Road DevelopmentProgramme for the North East Region.

Risks and Concerns

It is expected that the constructionSectors order inflows would pick up inFY11driven by spending in infrastructure,mainly from power transportation andreal estate. Infrastructure spending islikely to be the key driver leading toincrease in the order-to-book ratios ofconstruction companies, as real estateand industrial capex contribute only25-30% on overall basis. With more than50% of the investment expected from

power and transportation, these sectorsare likely to drive growth.

Despite rapid growth certain risks are inplace. These include the possibility of

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Economic Slowdown, delay in awardingcontracts, execution risks due to the long-term nature of the contracts withsignificant risks of cost reruns, volatility in

commodity prices and high workingcapital requirements.

As long as checks are maintained onthese, the Construction Sector looks setfor good times ahead.

Player Profiles

Larsen & Toubro Ltd

Larsen &Toubro (L&T) is undoubtedlythe foremost infrastructure company inIndia at present. L&T's engineering andconstruction department carries out largescale projects entailing ground-breakingdesign and wide-ranging constructionservices ranging from procurement,furn i sh ing , fi t t ing , t e s t ing andcommissioning. L&T is known for itsexcellence and timely deliverance.Thecompany continues to build on itsreputation by maintaining an all roundgrowth across the infrastructure segments

where it operates. The recently concludedfiscal was very profitable for thecompany; with profit and loss for thegroup growing by a huge margin of 44%compared to the previous year. L&Tsorder book crossed the Rs100,000 croremark as of March 31, 2010. The hugeorder book gives ample visibility to thecompanys continued leadership position.L&T is well poised to take advantage ofthe opportunities presented by India'samazing infrastructure development.Moreover, L&T has consid erab lepresence and capabilities in theinternational markets.

Punj Lloyd

Considered by many as being 'all-terrainspecialists', Punj Lloyd is one of thebiggest Indian engineering constructionfirms. Punj Lloyd Group's consolidatedtotal income for FY2010 stood atRs10,539 crore with an EBIDTA ofRs218 crore and PAT at Rs108 crore.The company performs its operations inAsia Pacific, China, Middle East, Europe,Africa, South Asia and Caspian. Itprov ides serv ices ranging f romengineering to project administration,innovative designs to construction, toeminent c l ients l ike Petro leumDevelopment Oman, British Petroleum,Pertamina, Shell, ADNOC, Cairn

Energy, etc. Some of the groups largewins in recent times include Indiaslargest solar-based EPC contract as wellas two projects from the MangaloreRefinery. This year, the Group also wonits first project in Thailand. The contract,valued at Rs574 crore, was secured fromPTT Public Company Ltd, a Thailandstate-owned oil & gas major.

Nagarjuna Construction Company

Nagarjuna Construction Company Ltd(NCC) crossed the Rs1 billion-turnover

mark in 1995. It established a propertyd iv i s ion in 1996 , f o l l owed bytransportation (roads, highways andbridges), water, electrical, power,irrigation, metals and oil & gas. NCC istoday one of the most dynamicinfrastructure companies in India; and itsorder book includes projects rangingfrom buildings & housing to water &environment, and from irrigation totransportation. NCC has achieved aturnover of Rs5897 crore for the yearended March 31, 2010. NCC was amongthe few companies to make early entryinto BOT and BOOT projects. It is also

looking at expanding in internationalmarkets by focusing more on roads, watersupply and buildings projects.

IVRCL Infrastructures & ProjectsLtd

Established as a premier EPC & LSTKservice provider in 1990, IVRCLInfrastructures & Projects achieved groupturnover of US$1 billion in less than twodecades of its operation. It has strongpresence in water, transportation,building & industrial structures andpower sector.The company entered into BOT/BOOT/DBOOT projects in 2001 andcurrently is executing some of the bigprojects across the country. IVRCL hadrecently won Rs3,100-crore BOT tollroad projects on the Goa-Maharashtra

border from NHAI. The company hasachieved a consolidated turnover ofRs5841.42 crore against Rs5074.07crore, recording a growth of 15.12%.Moving forward, the company sees hugepotential in the water sector as almost allthe states in India are water starved orwater stressed.

Simplex Infrastructures Ltd

Present in business since 1924, SimplexInfrastructures is one of the largest pureplay civil construction & engineering

contractors in India. It has strongpresence across various constructionverticals, which include industrial plants,power plants thermal; nuclear; hydel;urban infrastructures & utilities, buildingsand housing, marine, roads; railways;bridges & elevated road & rail corridors.The company's order book at the end of2010 was 14% higher at Rs11,491 croreas against Rs10,059 crore last year. Thecompany has created a strong presence inalmost all Middle East countries, WestIndies, Sri Lanka as well as in Russia.

GMR Group

The group focuses on both business andinstitution building in India. In 2010,GMR acquired key power plants acrossthe country, adding 1970 MW to itscapacity, commenced operations in thenewly constructed domestic Terminal 1Dand Terminal 3 of Delhi InternationalAirport and won three highway projectsspread across three states. The 235 MWbarge mounted power plant wassuccessfully relocated from Mangalore toKakinada. Revenues for the Group in theprevious fiscal year went up by a modest

14%. However, the net profit hasdeclined, inspite of EBIDTA going up by27%.

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Share of private and publicsectors


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Gammon India

It is the only Indian ConstructionCompany to have been accredited withISO 9001 certification for all fields ofcivil engineering works including design.The firm handles a wide range ofcomplex projects across geographies, withan order book standing of Rs14745 croreon the year ending March 31, 2010. Thistranslates into a growth of 14% ascompared to the previous year. Thecompanys portfolio has a good mix oftransportation, energy & transmissionand water. In 2010, Gammon acquired69.41% stake in Ansaldo Caldaie BoilersIndia Pvt Ltd (ACBIPL), a companyengaged in the business of designing,procuring, manufacturing, erecting ofsteam generation units. Gammon IndiasItaly-based wholly-owned subsidiary SAEPowerlines bagged $22.5 million worth ofturnkey contract in Algeria for a 220 KVtransmission line along with anotherpower transmission project worth $31million in Tanzania.

Hindustan Construction Company

The Company has a reputation forperforming large-scale infrastructureprojects besides developing hi-techconstruction equipment. It has carriedout a number of challenging andexpensive projects in sectors like oil andgas pipeline, power, urban infrastructure,transportation, irrigation and water

supply, etc, the most recent being theconstruction of the Bandra-Worli sealink. HCC has also acquired projects incountries like Iraq, Tanzania, SaudiArabia, Bhutan and Sri Lanka.

The company has seen a sizeable growthof 10% over the previous year in its orderbook, which stood at Rs18810 crore inM a r c h , 2 0 1 0 . H C C h a s m a d econsiderable progress at Lavasa; theproject has now been expanded to 18000acres as against the earlier plans of 12500acres. HCC Real Estate too has showngreat promise.

Jaiprakash Associates Ltd

Jaiprakash Associates Ltd (JAL) hasemerged as a leading infrastructureconglomerate having business interest ina wide range of areas like engineering &c o n s t r u c t i o n , c e m e n t , p o w e r ,expressways, real estate and hospitality.The Group showed an impressive

performance during financial year endedMarch 31, 2010 with total revenues ofRs10316.04 crore; up 72.52% from thelast fiscal. JIL sold over 1.5-million sq ft ofdeveloped real estate between April-May2010 in the Groups integrated townshipat Noida. In the cement business, JaypeeGroup has an installed capacity of 21.3MTPA and going forward it plans to scaleup the capacity to over 33.00 MTPA byFY12.

Lanco Infratech Limited

Lanco Infratech is currently one of thefastest growing infrastructure companiesin India. It has subsidiaries and divisionsacross a synergistic span of verticalsinc lu d ing cons t ru c t ion , power ,infrastructure, property development andrenewables. In the power segment, Lancocurrently has 9311 MW under operation

and construction. Furthermore, thecompany is currently constructing tworoad projects in Karnataka, the 81 kmBangalore-Hoskote-Mudbagal stretch onNational Highway 4 and the 82 kmNeelamangla - Devihalli stretch onNational Highway 48 on Build, Operateand Transfer (BOT) basis.

DLF

DLF's chief business is to develophousing, marketable and retail properties.Currently it has undertaken thedevelopment of 70 million sq ft of

housing projects which it intends to finishin the next three years. DLF has joinedhands with Delhi Development Authorityto develop townships in Amritsar, Pune,Gurgaon, Mumbai, Chennai and Goa.DLF has been the construction companybehind different malls in Hyderabad,Delhi, Bangalore, Mumbai, Amritsar,Ludhiana, Kochi and Chennai. Thecompany is also developing 50-75 hotelsa long with Hil ton Hotel s andinfrastructure and SEZ in India incollaboration with Laing O'Rourke (UK).

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Holcim AG, the Swiss cement giant, hastaken another small, measured steptowards the eventual merger of its twopremier Indian companies, ACC andAmbuja Cements. ACC and Ambuja witha combined capacity of 55 million tonnesrival ABGs Ultra Tech for the topposition in the cement industry.

Holcim is the world leader in cement as

well as being large suppliers of concrete,aggregates and certain construction-related services. The group has itsheadquarters in Switzerland withworldwide operations spread across morethan 70 countries.

In August, Holcim indicated to theSecurities and Exchange Board of India(Sebi) that it is weighing the option ofmerging ACC with Ambuja CementEastern (ACEL). It had then attributedthe move to the fact that ACEL, in whichACIL owns 95per cent, needs to shore upits public shareholding, in case it wants toremain a publicly-listed entity. Although

ACEL has a year's time to increase thepublic shareholding, Holcim hasapparently made it clear that the need todo so may not arise as it does not see theneed to have two listed firms in India, andwould work towards amalgamating them.

Holcim owns 35.77% stake in AmbujaCements. In ACC Cement, AmbujaCement India Pvt Ltd owns 45.91% andHolderind Investments Ltd 0.29%, takingthe total share owned by promoters to46.20%.

The board of ACC recently divulged thatit is folding in three wholly ownedsubsidiaries Lucky Minmat, National

Limestone Company and Encore Cement& Additives. The three arms are crucial toACCs and Holcims interests. LuckyMinmat holds limestone mines in theSikar district of Rajasthan, which helpssupplement limestone supplies to ACCsLakheri plant. National LimestoneCompany is engaged in mining and saleof limestone and holds mining leases forlimestone in Rajasthan. Encore Cementh a s a s l ag g r i n d i n g p l an t i nVishakhapatnam in coastal AndhraPradesh.

Last year, in August, Holcim hired HewittAssociates to suggest organizational

restructuring of its cement entities and onDecember 10, Holcim bought 22 lakhACC shares through Ambuja Cements forINR 238 crore as part of theconsolidation process in a deal brokeredby Enam securities

Although Holcim has denied such adevelopment, the two companies areexpected to close the merger in a span ofsix months. In the next five years, Holcimis also set to invest Rs4,700 crore to putup close to three greenfield plants and it isaggressively looking at acquiringcompanies in the central and southernbelt.

Please send in your suggestions

and queries to

[email protected]

The ACC-Ambuja Cements Merger
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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