Construction Sector: Current Scenario and Emerging

Trends
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trends.html

After recording a spectacular growth of over 12%, more than the countrys GDP in the past half decade, the Indian
construction sector all of a sudden lost stream in last fiscal largely due to global financial turmoil. Not just this, the
turmoil tremors created multiplier impact across sectors including steel, cement, power, petroleum, aluminum, IT
and ports, besides badly Bruising the Indian economy.

But few sectors such as telecom, urban infrastructure, railways, oil and gas, which are also generating large share
of construction activities have not been affected badly. These segments have registered a noticeable growth in
project orders from centre, states, and local firms. However, orders from overseas firms have drastically dwindled.

Current Global Scenario

Currently, the global economy is in severe slowdown mode amidst
deepening credit crunch and upsetting developmental targets of
economies across the world. In the prevailing scenario, infrastructure
remains a top priority for addressing developmental gaps as it is
considered omnipotent with potentials of lifting economies out of the
financial turmoil. The governments around the world are pumping money
to generate demands for goods and services by creating jobs through
higher spending into physical and social infrastructure. Likewise, the
Indian government on its part is not lagging behind on this score and has
taken concrete steps to revive the sector to regain its past glory.

Speeding Infra Spending

The government has initiated innumerable initiatives to lift the sector from its current dormant conditions. The
measures include authorizing the Indian Infrastructure Finance Company Limited (IIFCL) to raise Rs.100 billion by
issuing of tax free bonds to make highways and port projects funding worth Rs. 250 billion available to the sector. In
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order to finance projects worth Rs. 750 billion over the next 18 months, the IIFCL has been given permission to raise
additional funds worth Rs. 300 billion.

Other measures include liberalization of the external commercial borrowing (ECBs) policy, revision in the cap for
home loans to Rs. 2 million from Rs. 0.5 million through inclusion in the priority sector, increase in foreign
institutional investors limit in rupee denominated corporate bonds from $6 billion to $15 billion exemption of
countervailing duty on cement and TMT bars and structural, close monitoring of the government spending to
expedite expenditure for all schemes and programmes.

The Planning Commission has estimated that an investment of about $492 billion will be required for the
infrastructure sector during the Eleventh Five Year Plan. Whereas private investment seems difficult to come by in
the current scenario, public investment can be expected to materialize or even increase. While it is essential that the
government plays a vital role in improving the pace of implementation of key projects, construction companies need
to upgrade their project management expertise and ensure that there is adequate capacity to undertake and
execute projects on time.

Construction Equipment Industry

The ancillary industries including $3.1 billion construction equipment industry has also witnessed a slowdown. Prior
to the crisis, the Indian equipment market was growing at a rate of about 35% for almost seven years. However,
during October-December 2008 quarter, the growth rate declined by 30%.

The new equipment purchases have slumped due to a lack of funds since
buying involves large upfront payments. According to available reports,
equipment sales have taken a hit of about 18 to 25%. While equipment
already leased out is unaffected, the decline in the number of new
projects has led to a significant fall in new leasing contracts. This situation
is expected to continue for the next couple of months. Many construction
equipment companies have cut down production and are approaching
their respective governments for financial support.

To complete critical projects, developers are resorting to selective leasing

and renting of equipment. Rental rates have consequently firmed up,
benefiting companies involved in the rental business. Further, the price of major input material such as cement and
steel has declined significantly, thus somewhat mitigating project costs.

In fact, the fundamentals of the Indian growth story are sound, and the demand for infrastructure and industrial
activity continues to be strong. With the government stepping up its support to the infrastructure sectors along with
adequate monetary measures aimed at increasing credit flow, the situation is likely to stabilize in the equipment
sector, though expectedly with some lag.

Roads & Highways

Given the importance of road connectivity to the economic and social
development, the road network in India is not up to the mark. The network
spans about 3.3 million km but has road densities of 2.75 km per 1,000
people and 770 km per 1,000 sq km as compared to world averages of
6.7km and 840 km respectively. Further, about 15% of the network carries
80% of the traffic.

But with the setting up of an effective public-private partnership (PPP)

model by the government to expand the road network, this sector
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witnessed rapid growth in the past few years and it has become the top
contributors to the construction industry. Moreover, the National Highways Development Programme (NHDP) has
created the biggest construction opportunity in the road and highways sector. The programme aims at developing
50,000 km of national highways in seven phases by 2015 with an investment of over Rs. 3,000 billion at 2007
prices.

Till January 2009, projects covering 33,000 km under phases I, II, III A and V have been under development out of
which about 10,000 km has been four-lane. The Golden Quadrilateral, providing four-lane connectivity to four
metros is near completion and the North-South-East West (NSEW) corridor is around 45% complete, whereas
Phases III, V and VI are under implementation. Phases IV and VII are at initial stages of implementation.

Strikingly, the policy and regulatory framework has gone a sea change in
the past 10 years wherein funding share of private investment has
registered a marked increase and share of traditional sources declined
drastically. In the prevailing circumstances public spending in the road
sector through budgetary sources or the CRP will not be impacted by the
crisis. The projected commitment of Rs. 131.73 billion for financial year
200809 under the CRF is expected to be met. But the PPP investments
under the NHDP have been impacted by the crisis. Nearly 60% of the
future funding requirements of the NHDP Rs. 3,014.88 billion till 2015 are expected to come from the private sector.

The PPP projects for which funds have already been tied up might also face difficulty in drawing down as the risk
perception of the sector has risen. Available reports suggest that about 60% of the awarded national highway
projects yet to achieve financial closure. In the current scenario, the new highways projects in the private sector may
find it tough to achieve financial closure.

Moreover, future prospects for private sector investments in roads would hinge on the effectiveness of the stimulus
package in terms of persuading tenders to reassess the risks associated with the sector. National and state level
investments in the sector are unlikely to be impacted though the economic slowdown may impact toll collections.

But the road sector, which has already seen a massive shift in the process and mindset, is expected to undergo a
further change in the next couple of years. New domestic companies are expected to foray into road development,
international players are also expected to enter the Indian road sector and existing players are churning out new
strategies to retain their stronghold. With increasing competition, only players with strong organizational structures
and project management capabilities are expected to gain ground in the long-term.

Urban Infrastructure
To boost urban infrastructure across the country, the government has initiated multiple measures to lift the
infrastructure and construction sectors from the ongoing slowdown and has allocated Rs. 11,842 crore under the
Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which is much higher than Rs. 6870 crore
sanctioned in the previous budget. The funds aimed at integrated development of urban infrastructure and services
in rural areas and urban cities to boost allied sectors including construction material, steel and cement.

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In addition, the government has also set aside Rs. 40,900 crore for 200910 for its Bharat Nirman initiative. This is a
time bound plan for the development of housing, rural roads, power, irrigation, telephony, and drinking water supply.
This would in turn boost business opportunities to small and large players alike in the construction and infrastructure
as they would offer sizeable scope for contractual work for the local populace.

That apart, the decision of the government to continue with a corpus of Rs. 4,000 crore for rural roads in the Interim
Budget has brought cheer to the companies engaged in construction, infrastructure, logistics and transport
segments. The move is expected to bring a shift in the supply-chain pattern and improve the delivery of construction
materials as due to lack of such facilities in the countryside, the delivery is inadequate both in term of quantity and
quality. Today, most of the tier II and III towns are emerging as rural market hubs of production, consumption and
distribution.

The government has also launched the Urban Infrastructure Development Scheme for Small and Medium Towns
(UIDSSMT) with an outlay of Rs. 64 billion to address infrastructure needs of 5,098 small towns and cities with an
outlay of about Rs. 1,064. The JNNURM outlay of over Rs.1 trillion is targeted at augmenting urban infrastructure
needs of over 65 mission cities under which the government provides grants ranging from 35% to 90% of the project
cost, depending upon the size of the city with state governments and private players contributing the rest.

Moreover, the emphasis on creating infrastructure in villages through Rural Infrastructure Development Fund (RIDF)
has raised hopes for construction and consumer companies hopping that the growing demands from the rural
heartland will boost the sagging sectors. Most construction and infrastructure companies from power to roads,
airports, ports and urban transport are asking for more in the final budget. Likewise oil & gas, civil aviation, ports,
bridges, and semi-urban areas are set to offer lot of opportunities to the construction industryalso to its important
constituents like construction equipment, real estate and allied building activities. The measures are bound to lift the
commodity linked industries including cement, steel, aluminum, glass, paint, stones, and titles.

The government recent measures focused on encouraging banks to fund PPP projects. This is a positive and
progressive move at a time when the financing options of infrastructure players have shrunk in the backdrop of
global credit crisis, delaying financial closures. Initially, the banks were demanding a higher equity proportion
compared to earlier norms. The refinancing measures will provide better comfort to banks in lending to the
infrastructure sector.

Railways & Metro

Indian Railways is rapidly consolidating its position and staging a spectacular turnaround largely due to an efficient
utilization of resources through increased wagon-loads strictly sticking to its time schedules, and more rational
pricing. An investment outlay of Rs. 2,510 billion has been proposed for the Eleventh Plan period, of which around
67% is proposed to be mobilized through internal generation and extra-budgetary resources. Huge opportunities are

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in the offing in the form of upcoming dedicated freight corridor (DFC) and the Delhi-Mumbai Industrial Corridor
running along with it, as well as the metro rail projects in about a dozen selected cities of the states.

Infrastructure is being upgraded by way of new railway line projects, gauge conversion, doubling, construction of
terminals and logistic parks. As per the eleventh Five Year Plan Working Group Report, the total fund required for
capacity enhancement projects during the plan period is Rs. 544 billion, apart from Rs. 70 billion for national railway
projects.

In addition, huge construction opportunities are also available for rail-road connectivity and other capacity
augmentation projects being undertaken by the Rail Vikas Nigam Limited (RVNL). Major opportunities opened up in
the modernization projects of 26 railway stations, including those of Delhi and Mumbai to be upgraded on the PPP
model. The Indian Railways has decided to attract private investments by allowing areas around stations and above
platforms to be commercially developed. This includes separation of operational passenger handling areas from the
proposed commercial space as is the case in airports with an estimated investment of about $500 million each.

Vitally, this segment has not been affected by the ongoing global financial crisis because they are funded by the
government directly from its own resources. The only noticeable impact can be seen in the segment is the slowdown
in freight traffic, which may affect the internal resources of Indian Railways.

That apart, the Dedicated Freight Corridor (DFC) is said to be the biggest venture of Indian Railways to date,
envisaging construction of dedicated freight lines on the eastern and western sides of the country, covering 2,729
km through seven states. The two corridors will be interlinked at Khurja and will require a total investment of Rs.
372.18 billion. A special purpose vehicle (SPV), DFC Corporation of India (DFCIL) was set up in 2006 to implement
the project with a paid up capital of Rs. 500 million.

DelhiMumbai Industrial Corridor (DMIC)

Lauded as the driver for the next level of economic growth of the Indian economy, DMIC has been planned as a
global manufacturing and trading hub in India. The dream project involves the development of a 1,500 km industrial
belt between Delhi and Mumbai passing through seven states extending upto 150km on either side of the DFC. The
investment requirement for the entire DMIC project is Rs. 3,648 billion.

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According to sources, 24 industrial development hubs have been identified in the form of industrial regions for
development across the corridor. The Phase 1 of the project between Delhi and Vadodara will be carried out during
2008-12 and Phase II will be extended till 2013-18. The project will have enormous potential for development in
terms of industrial growth and employment. In a five year period, it is envisaged to double the employment potential
upto 14.87% compounding annual growth rate to be triple of the industrial output of about 24.57% and quadruple
exports from the region is expected to be 31.95% with a total employment potential of about 0.8 million masses.

Metro Rail Projects

Currently, the focus is on developing rail based mass rapid transit system
(MRTS). Several cities across the country have launched heavy rail
based mass rapid transit system projects requiring large investments. A
couple of them are also initiating monorail and light rail systems. As of
now, seven cities including Delhi, Mumbai, Kolkata, Bangalore,
Hyderabad, Chennai, and Kochi have already initiated heavy rail based
transit system projects. Apart from this, some more state governments
like Punjab, Uttar Pradesh and Gujarat are also inclined to introduce
metros in their major city clusters. According to India Infrastructure
Research, investments of over 860 billion lined up for heavy rail based
project across the country, of which Rs. 550 billion is planned to be
mobilized in the next five years.

Real Estate
Falling inflation, interest rates and above all the recent fiscal stimulus announced by the government, will give
indirect push to construction and housing activities across the country. Steel players will benefit from government
measures such as bringing HR coils under the restricted category and levy of import duty on flat products. The
reduction of excise duty in cases where the output is sold directly to the consumer, withdrawal of export duty on iron
ore fines and export duty reduction on iron ore lumps and pellets will encourage iron ore exports, besides
encouraging developers to focus on affordable housing.

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Similarly, the fiscal sops and stimulus and classified loans under Rs. 20
lakh as priority sector lending are all set to brighten the prospects of
housing sector. The new classification of loans is aimed at encouraging
banks to lend. The Rs. 4000 crore refinance facility for NHB will ensure
availability of loans for the sector. The reduction in home loans rates by
PSU banks to Rs. 5 lakh and 9.5% for loans in the range of Rs. 5 to 20
lakh has prompted large private players such as HDFC and ICICI bank to
cut rates, the development will again encourage housing activities which
will again boost the business of steel and cement and construction
companies.

Recently, the centre has given a major incentive to the states to engage
private developers by agreeing in doling out 25% of the total cost of
external services such as drainage, roads, sewage and a water supply as grant to state governments.
Consequently, the meltdown may soon make housing for the masses a reality. The Centre has been awaiting a reply
from state governments on its Rs. 5,000 crore package to create on million affordable houses across the country. In
the recent past, developers have also announced plans to foray into the affordable housing segment. The leading
players in the real estate business have also unveiled plans to build houses in the 20 lakh category. In fact, the
meltdown may soon make housing for the masses a reality.

Power Sector
With an estimated investment of $150 billion by 2012, the power sector is
destined to give much needed impetus to the economy in the time of
current financial crisis. Despite slowdown in industrial and manufacturing
sector, the demand for power remain robust. The Integrated Energy
Policy estimated that to wipe out poverty from the country the economic
growth needs to be at least 8 to 9% annually until 2032 and by that time
the power capacity needs will be as much as 800 GW.

Meeting the projected target, the Union Government has decided to add
about 78,000 MW of power generation capacity during the Eleventh Plan
period. The generation capacity additional needs are being
complemented by commensurate investments in transmission and
distribution networks.

In the recent past, the sector has witnessed increased investment interest
from private players especially in the generation segment and in the past
half decade the trend has registered consistent growth. The demand
supply gap of about 16% as peak shortage and 10% as average shortage
indicates a huge opportunity for developers and their financiers including
power equipment suppliers. The generation segment has grown at an
annual rate of 5.6% during the period and transmission and distribution
segment have also grown at an annual rate of 3% and 1.5% respectively. In the past couple of years, the power
generation pace has grown from 124.287 MW in 200506 to 143.061 in 200708 and the Electricity Act 2003 is said
to be the main driver behind the marked growth.

Conclusion
Now the construction activities have started picking up. Recently, the Government has issued contracts worth Rs
1,861 crore relating to projects in mining, railway, infrastructure, commercial buildings, and some of the construction

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companies are also coasting along with a steady flow of contracts. About 90% of these contracts are from the
Government agencies and this is going to be the mainstay of business in construction sector for some time to come
till such orders start flowing from the private sector. It is indeed to the credit of some of the construction companies
that despite odds, these companies have shown exemplary perseverance in tackling recession to carry out
construction work, others would also ride well through the present dull phaseas the situation improves. It is expected
that sooner rather than later, the sleepy construction project sites would pulsate with construction work once again
and one would see trucks loads of men, materials and machinery moving to and frowith men and women working on
a war footing to translate countrys development vision into a concrete reality. Shedding its initial pessimism, the
construction equipment sector is also getting into optimistic mode and is busy in giving final touches to their
expansion plans to add new manufacturing facilities sensing a demand pull in the next 6-8 months. All in all, the
construction industry was no doubt downbut not out.

The next 2-3 years are going to be the moment of reckoning for the
construction industry to demonstrate its managerial, financial and
technical prowess to establish new benchmarks in construction
management, construction quality, imparting value addition to its products
and services in critical construction equipment product line. To resist such
like present global meltdown, the industry has to look within to develop its
competitiveness across segments through enhancing their capabilities in
R&D to leverage innovation through indigenous capability and expertise.
They need to exploit and build on their own inherent labor and material cost advantage and resource savings to
manage crisis. The present time is the best time to revisit some of these and other strategies and explore new
growth avenues not only to mere recover from such situations, but also to prepare itself for new global shocks. With
or without stimulus packages, the best means for the well being and growth come from within. What matters most is
to put ones best foot forward in recession, recover fast and emerge stronger than ever.

NBMCW April 2009

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