Construction Industry

Power-Pack

1
Table of Contents

• Institutional Framework :3

• Demand Analysis :5

• Profitability Analysis : 17

• Long-term Investments : 23

2
Institutional Framework

3
Institutional framework - Sector wise

4
Demand Analysis

5
Aggregate revenue growth seen gathering pace in 2016-17

Note: Standalone data for 29 companies based on availability in the public domain,the
numbers for 2014-15 are based on interim results
P: Projected 6
Aggregate order book and order inflows

• In 2015-16, order inflows dropped by about 30% as a result of

lower order inflows for L&T in the first half.
• L&T has announced that it would be expecting lower order inflows
for the second half as well.
• Order book will remain flat even though it grew by about 10% in
first half of this year as order inflows were very strong in H2 2015.

7
 Quarterly order book

Note: The quarterly order book growth is calculated on the order book of six companies,
comprising NCC, L&T, Punj Lloyd, IVRCL, Simplex Infrastructure and HCC.
8
Company-wise order book growth in 2014-15

9
 Quarterly order inflows (Rs billion)

Note: The order inflow is for six companies, comprising NCC, Punj Lloyd, L&T, IVRCL
Simplex Infrastructure and HCC.
10
Order book-to-turnover ratio improves, but owing to slow
execution
• The industry's order-book-to-turnover ratio rose to 3.5 times in
2014-15.
• However, this number needs to be examined cautiously as it has not
increased owing to an improvement in order inflows.
• The number has rather risen because of a slow moving order book
and falling revenues owing to tepid project execution.
• In reality, many orders are either stalled or are being executed
slowly, impacting revenue growth for these companies.
• Some instances are:
• Punj Lloyd: Projects totalling more than one-third of its order book
are being executed slowly owing to political turbulence in Libya.

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Order book-to-turnover ratio improves, but owing to slow
execution
• HCC: Work on its commercial real estate projects is progressing
slowly.
• Gammon India: Large road, power and port projects are being
delayed
• However, companies are slowly clearing their order books by
selling off stalled and slow-moving projects.
• In 2014-15, L&T had cleared orders worth Rs 70 billion, which were
stalled for over two years.

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 Order book-to-turnover ratio rises in 2014-15

Note: This data is for six companies, comprising NCC, Punj Lloyd, L&T, IVRCL Simplex
Infrastructure and HCC 13
 Consolidated debt of construction companies

Note: Represents consolidated data for 22 companies based on availability of information

in the public domain. Debt for Larsen & Toubro has been taking after excluding debt of
L&T finance. Data for 2014-15 is based on interim results 14
Working capital position of construction companies remains
stretched in 2014-15
• A delay in payment by government agencies and prolonged
arbitration proceedings for dispute resolution has impacted
companies' working capital position.
• Debtor days have been rising almost continuously which has
affected project execution and added to the debt pile.
• Companies like L&T, Simplex Infrastructure and HCC continued to
struggle with high debtor days in 2014-15.
• As per, Larsen & Toubro its working capital-to-sales ratio at 25 per
cent as of March 2015 was at its peak levels.
• As per Simplex Infrastructure, its debtor days also rose to 233 days
as on March 2015 as compared to 204 days as on March 2014.

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Working capital

Note: Represents standalone data for 19 companies based on availability of

information in the public domain

16
Profitability Analysis

17
Profitability remained under pressure in 2014-15, H1FY16
• Though raw material costs were benign, construction companies
profitability stayed under pressure in 2014-15 and this continued
through the first half of FY16.
• While operating margins fell by by about 10 basis points (bps), net
margins deteriorated by 50 bps in 2014-15.
• In the first half of FY16, operating margins declined by 70 bps
while net margins dropped by about 50 basis points y-o-y.
• Though prices of key inputs such as steel and cement remained
more or less stable, lower fixed cost absorption affected
profitability, as project execution slowed leading to cost overruns.
• Similarly, a rise in interest costs owing to players' mounting debt,
hurt net margins.
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Profitability remained under pressure in 2014-15, H1FY16
• Excluding L&T, large construction companies reported net losses
to the tune of Rs 26.5 billion (5 per cent of total income), which
widened by around 140 bps y-o-y in 2014-15.
• Besides slow execution, many companies' profitability was also
impacted by long outstanding claims.
• Some instances are:
• IVRCL: Provisions of Rs 0.5 billion made towards trade receivables
in the December 2014 quarter pulled down the company's margins
by about 200 bps.
• The company also has unbilled revenues of Rs 1.5 billion for the
past three years.
• Punj Lloyd: Has claims of Rs 7.4 billion as of March 31, 2015 from
ONGC's Heera Redevelopment. 19
Profitability remained under pressure in 2014-15, H1FY16

• It also has unsettled claims and performance security worth Rs 3.8

billion and Rs 1.7 billion, respectively, held up in the Thailand
pipeline project.
• HCC: While Rs 777 crore was awarded to HCC in 2014-15 through
the arbitration process from its various clients, another
approximately Rs 4900 crore is currently under arbitration.

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Net margins to remain subdued

Note: Standalone data for 29 companies including large and mid-sized players. 2014-
15 numbers are based on interim results 21
P: Projected
Steady decline seen in aggregate interest coverage ratio since
2009-10

Note: Consolidated data for 22 companies based on information available in the

public domain. 2014-15 numbers are based on interim results.
22
Long-term Investments

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Long term growth to be driven by infrastructure

• Over the next five years, infrastructure projects will provide the
maximum construction opportunities, contributing to almost 92 per
cent of construction spends during the period.
• The central government's focus on the roads, urban infrastructure
and railways segment will boost infrastructure investments.
• Conversely, spends on industrial projects are expected to be lower
as companies in the metals, cement and automobile sectors slow
down expansion plans amid low utilization levels and muted
demand.

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Total construction spends (at current prices)

Note: E: Estimated; P: Projected

Real estate not included in the analysis
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Total construction spends (at current prices)

• Within infrastructure, road projects - both National Highway

Development Programme (NHDP) projects and highway road
projects - will be a key investment driver.
• Moreover, projects such as metro rail, water supply & sanitation and
railways are also expected to be implemented rapidly, given the
sizeable budgetary allocations.
• The table below provides a snapshot of expected construction
opportunities across key sectors, along with a brief reasoning.

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Sector-wise construction spends

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