Construction activity, which constitutes around a half of project investment, is relatively stable compared to investment in plant and machinery. The problem for construction companies has more to do with fierce competitive bidding due to slower growth in contracts and job works, delayed execution, shortage of quality manpower, deficient cash flows and eroding margins, says Dr. M.S. Kapadia.

Construction activity in India has been wilting, like industrial project investment, under a slowing economy and crumbling investment, even as it has remained in the positive growth zone compared to dwindling industrial project investment. Thus, the growth rate in real income in construction income dropped to an 18-quarter low of 2.8 per cent during the first quarter of the ongoing fiscal 2014. Project investment seems to have fared worse as gross fixed assets, or capital formation that includes investment in plant and machinery apart from construction, declined 1.2 per cent over the quarter. Delays in projects, mostly on account of impediments in issuance of clearances, deficient project execution and lack of fuel for power plants, meant that projects with large sums of capital invested in them were not getting completed and therefore not yielding expected current output.

Reflecting wanting project investment, the project cost index as measured by ERIL Index of Cost of Project Inputs, declined during April-August 2013 and stagnated even on y-o-y basis in August. Whereas cement production was up 2.7 per cent and alloy and non-alloy production 4.1 per cent during April-July, cement prices during July remained at year-ago level and iron and semis WPI showed 7.8 per cent decline on annual basis.

Contracts awarded
Over the 12-month period September 2012-August 2013, 1,725 major ontracts valued at over Rs.2.48 trillion were awarded for undertaking arious job works including turnkey, EPC, BOT and consultancy assignments, according to ProjectsToday. The high value of Rs.302 billion job work was awarded in April last while the low of Rs.73 billion was awarded in October last year.

Less than 10 per cent of orders were for works in overseas countries, though in terms of amounts the overseas contracts formed a larger share (24 per cent). By the way, in several cases, the information on value of contract awarded was lacking in publicly available information sources. Coal/lignite power projects initiated works worth over Rs.492 billion through award of 263 contracts. Railways handed out 140 contracts for 467 billion; power distribution companies gave out 298 contracts for Rs.294 billion and roadways 199 contracts for Rs.165 billion between September 2012-August 2013.

Finances of companies
The dismal scenario on investment front had inevitable fallout on perceptions of the stock market about prospects of companies engaged in construction including realty segment. Thus, S&P BSE Realty Index was running 34 per cent lower on y-o-y basis in September 2013, against around 1 per cent average in case of companies covered in S&P BSE 500 index.

At micro level, the deteriorating finances of 16 major realty and construction companies amply mirror the difficulties of operating in an environment of uncertainty, dwindling volumes and eroding margins. Thus, the total profit after tax of these companies dropped as much as 38 per cent, several times the average decline suffered by India Inc. in general; margins were mauled and finances remained strained.

Sales of 16 construction companies grew 3.2 per cent, similar to the trend observed in India Inc. Sales of construction companies are, by the way, bumpy due to accounting practice of revenue recognition of sales in long-term high value contracts and hence they do not reflect volume of activity of the companies. Other income, though forming around a sixth of sales, did not lend support in boosting bottom line of PAT. Interest cost rose 3 per cent in Q1. Larsen & Toubro Ltd, a giant technology, engineering and construction conglomerate, recorded gross revenue of Rs.12,704 crore during Q1, registering an increase of 5 per cent over the corresponding quarter of fiscal 2013.

The company’s PAT declined by 12 per cent to Rs.756 crore. The company’s order book at Rs.165,393 crore (+8 per cent)at the end of June showed 8 per cent annual growth. Land banks & order book A major feature of realty companies comprises land bank owned by them for development purposes. Afew such land banks as also orders are listed below:

  • DB Realtors claims inventory of over 90 million sq. ft of prime property across 36 projects.
  • Godrej Properties is currently developing residential, commercial and township projects spread across 87.6 million sq. ft in 12 cities.
  • Sobha Developers has 45 ongoing residential projects aggregating to 26.79 million sq. ft of developable area and 18.90 million sq. ft of saleable area.
  • HDIL has a land reserve of 226.86 million sq. ft.
  • Sunteck has land bank of over 36 million sq. ft of city centric development projects in Mumbai.
  • Directorate of Town & Country Planning, Haryana, has issued a licence to Anant Raj to set up a group residential housing colony at Gurgaon with a saleable area of around 2.8 million sq. ft.
  • Leighton Welspun Contractors has been awarded the contract by DLF to build the super luxury residential development, The Camellias, at DLF5, Gurgaon, valued at Rs.14.5 billion ($250 million).
  • Indiabulls Realty is developing properties in various cities like Mumbai, Ahmedabad,Chennai, Hyderabad and Sonepat.
  • Phoenix Mills plans to foray into developing real estate in eight cities measuring a total of 214 lakh sq. ft. These include Mumbai, Bengaluru, Chennai, Pune,Raipur, Agra and Indore.
  • HCC had an order backlog of Rs.13,969 crore .
  • Pratibha Industries has bagged Rs.230.9 crore order from PHED, Ajmer,Rajasthan.

Assessment
As noted earlier, construction activity, which constitutes around a half of project investment, is relatively more even, compared to investment in plant and machinery. So, the problem for construction companies at present is probably more about fiercely competitive bidding due to slower growth in contracts and job works, delayed execution, dearth of quality manpower, deficient cash flows and eroding margins. RBI has recently cautioned banks against lending under 80:20, or 75:25 schemes, to individual home loan borrowers and advised them to link disbursal of housing loans to the stages of construction of housing projects/houses and desist from upfront disbursals in cases of incomplete, under-construction and greenfield housing projects. Finances of concerned developers are likely to come under strain because of the RBI missive, which, with probable interest rate hikes, would possibly lead to further liquidity squeeze and increase in financing cost for the developers. Additionally, construction companies are reeling under falling margins and payment delays, particularly in government contracts.


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