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Construction sector
Introduction:
Indian construction sector consist of Road, Railways, Airport, Power, & Urban Infrastructure.
Infrastructure development is the most crucial factor for India's economic and social
development. If we are talking about a double digit India's GDP growth for next 10-15 years
we have to invest in the infrastructure development to achieve and sustain this growth. India
has the necessary human and natural resources for becoming world's leading economy but
without infrastructure these assets cannot be adequately utilized.
This case will focus on the fundamentals of the companies in construction sector and the
technical analysis of the same. It is important for investors to study this sector, as Central and
State Governments are realizing the need of good infrastructure. The sector has attracted
significant investment during the eleventh Five Year Plan of 2007-12. The required
information for the analysis of the sector has taken from the company web sides and from
various other web sites which are mentioned at respective places.
Economy analysis for Construction sector:
The Indian economy returned to strong growth level in the first quarter of FY 2009-10 and
continued the strong momentum with the real GDP rising by 8.6% y-o-y in the Jan-March
quarter. 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. Indiangovernment has allowed 100% FDI in construction sector.
The rising population requires large amount of public infrastructure like Roads, Airports,
railway station etc. Again the increase in imports and Exports requires highly equipped ports.
Industry Analysis for Construction sector:
Industrial sensitivity: The Construction industry was heavily dependent upon the
government spending for major subunit such as Airport, Roads, Ports, power etc, but because
of the Public Private Partnership (PPP) the government burden is reduced. Most companies
in construction sector are into the development of Roads, Airports, Power plants, Ports and
Urban Infrastructure. We will look into two main infrastructure, Road development and
Power generation in this case to study the opportunities for the construction companies in
field of development of primary infrastructure of a country.
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Roads:
Indian road network of 33 lakh Km. is
second largest in the world and consists of,
about 65% of freight and 80% passenger
traffic is carried by the roads. National
Highways constitute only about 2% of the
road network but carry about 40% of the
total road traffic. Number of vehicles has
been growing at an average pace of 10.16%
per annum over the last five years.
National Highways Authority of India
(NHAI) is mandated to implement National
Highways Development Project (NHDP) which is Indias largest ever highway project. The
government has taken policy initiatives to attract private developers and to do 20 km a day.
The Governments, through Public Private Partnership is enthusiastic about investing in road
and highway projects. The actual investment is much below the target. Despite this under
achievement, the road sector saw a five-fold jump in highway project disbursals in FY 2009-
10 compared with FY 2008-09. Upto February, NHAI awarded 36 projects of 3,166 km
against 8 projects spanning 643 km in FY 2008-09.
NHAI (National Highways Authority India) proposes to finance its projects by a host of
financing mechanisms. Some of them are as follows through budgetary allocations from the
Government of India. Cess, Loan assistance from international funding agencies, Market
borrowing, Private sector participation.
Power Generation
Installed Power Generation Capacity by Sector and Fuel The following table shows summary
of Indias installed power generation capacity as of March 31, 2010 sector wise and fuel wise
( Source: CEA, March2010)
Installed Power generation Capacity (Fig. In MW)
Fuel Sector
Central State Private Total % to Total
Coal 31,165 44,977 8,056 84,198 53%
Gas 6,702 4,046 6,308 17,056 11%
Nuclear 4,560 - - 4,560 3%
Hydro 8,565 27,065 1,233 36,863 23%
Others - 3,304 131,417 16,721 10%
Total 50,993 79,392 29,014 159,398 100%
% To Total 32% 50% 18% 100%
0%
2%
4%
14%
80%
KMs
Expressways
NationalHighways
State
Highways
Major District
Roads
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The Indian power sector has historically been characterized by demand-supply gap which has
been increasing over the years. In FY09, peak energy deficit was at 12%. This figure for 2010
has infact increased to 13.3% as per CEAs provisional numbers. Indias peak power shortage
is projected to further rise in coming years.
With the Indian economy on a high growth trajectory, bridging demand-supply gap is going
to be a serious challenge in coming years. The National Electricity Policy (NEP), 2005
recognizes electricity as a basic human need and targets a rise in per capita availability to
1,000 units per person by the end of 2012. Per Capita power consumption has gone up from
567 units in 2003 to 704 unit in 2008. To fulfil the objectives of the NEP, a capacity addition
of 78,700 MW is envisaged during the Eleventh Five Year Plan. The power sector is
expected to grow at 9.5 per cent per annum. In power sector, the year 2009-10 accounted for
the highest capacity addition, i.e. 9,585 MW in a single year in the last 60 years. Altogether
in the 11th five-year plan 62,302 MW capacities are likely to be added in the power sector, as
against the target of 78,700 MW. As stated by Honble Minister of Power, Mr. Sushil Kumar
Shinde, while addressing the Construction Summit 2010, the government is now planning to
set the target of achieving 1,00,000 MW capacity addition in the 12th Five Year Plan. 60% of
which is expected to be added by the private sector.
Fuel and sector wise capacity additions envisaged during the Eleventh Five Year Plan ending
March 31st, 2012
Expected Capacity Addition in 11th Five Year plan (Fig. In MW)
Sector Hydro Coal Gas Nuclear Total
State 3482 19985 3316 0 26782
Private 3491 9515 2037 0 15,043
Central 8654 23,350 1490 3380 36,874
Total 15,627 52,850 6843 3380 78,700
Source: CEA, March2010
According to latest reports GOI, in the next 20 years, urban population in India will grow to
590 million, twice the population of USA today, 70% net new employment will be generated
in cities, and 60 cities will reach a population of 1 million compared to 35 cities in Europetoday. Average national income will grow four-fold in the next 2 decades. Therefore, for
infrastructure developers, the sky is the limit.
Looking towards the growth in the population and the needs of the coming aspiring
generation, the gap in the infrastructure India have and the infrastructure India needs is
significantly very high. So there is lot of scope for constructions sector companies to generate
profit by serving to the Nations growth.
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Company Analysis
GMR Infra
GMR Infrastructure Li ited was
ori inall incorporated on May 10, 1996
as a public li ited company called
Varalakshmi Vasavi Power Projects
Limited in the State of Andhra Pradesh.
The Bangalore headquartered group is
one of the fastest growing infrastructure
organisations in the country with interests
in Airports, Energy, Highways and Urban Infrastructure (including SEZ). Employing the
Public Private Partnershi p model, the group has successfully implemented several
infrastructure projects in India.
Delhi International Airport Ltd has built and now controlled by GMR. Also GMRis holding
63% share in Hyderabad International Airport. Company is also holding IPL team called
Delhi Daredevil s.
Uni Dimensional analysis of GMR(`. In Cr)
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Revenue 152.32 159.20 102.77 33.39 59.60
Net profit 13.45 97.67 62.70 2.88 35.55
Capital 5,840.02 5,702.22 5,604.57 1,639.78 368.48
Debt 2,575.00 420.30 479.18 197.17 282.65
Fi ed Asset 23.71 0.81 0.68 0.81 1.11
NetCurrent 2,130.33 2,059.85 1,302.75 492.11 211.77
Investment 6,252.50 4,061.87 4,780.31 1,344.03 438.24
Current ratio 2.51 11.61 5.30 3.19 3.72
Debtors ratio 4.08 NA NA 2,319.91 111.44
Inventory turnover
ratio
1,038.00 NA NA NA NA
Profit margin 8.33 61.16 60.21 8.49 58.43
Earnings per share 0.04 0.54 0.34 0.09 1.34
Dividend payout
ratio
NA NA NA NA NA
Return on total 0.81 2.05 1.46 1.67 8.18
promoter
s
75
Fore
olding
8
B nks/Fis
/
8
others
9
Shareholding
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capital employed
P/E ratio 1558.75 87.87 220.58 400.22 NA
Dividend yield NA NA NA NA NA
Total debt to equity 0.44 0.07 0.09 0.12 0.77
Uni-Dimensional Analysis:
The companys revenue has grown with a CAGR 18.54% over the five years span. Company
has taken huge debt compare to previous year in 2010 which directly reflects into the increase
in Investment in 2010.Current ratio has came down from 11.61 to 2.51, which shows the
company has efficiently managed the liquidity. The companys net profit has came down
from 97.67 to 13.45 because increase in the manufacturing cost of the project. The company
has not given any dividend over last five year and has retained the earnings. Debt to Equity
ratio of the company has increased to 44% but still the company D-E is under the industry
average.
IVRCL
The company was established in 1990 and
Achieved Group turnover of 1 Billion USD
in less than two decades of our operations.
Strongly entrenched with proven domain
knowledge, experience and credentials,
IVRCL operates in the following
infrastructure sectors:
1) Water & Environment
2) Transportation
3) Buildings
4) Power
The company has announced that it has grabbed the orders of around Rs. 5502 in thisfinancial year. IVRCL has client list like Oil & Natural Gas Corporation Ltd, Bharat HeavyElectrical Ltd, National Thermal Power Corporation Ltd, Nuclear Power Corporation of India
Ltd, Bharat Petroleum Corporation Ltd, and Indian Oil Corporation Ltd etc..The company has
went into joint venture with CADAGUA, S.A, Spain plus expressways berhad, Malaysia
Beefesa, Spain, China Raily 18th
Bureau (group) co., Ltd, China Telcon, India - Hitachi -
Green Arm, Japan etc. The JV has helped the company to increase the revenue significantly.
In ian
Promote
r
11
FII's
63
private
Corporat
e Bo ies
13
General
Public
13
Share Holding
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Uni-dimensional analysis of IVRCL Infra (`. In Cr )
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Revenue 5507.784 5010.350 3665.124 2313.266 1537.86
Net profit 70.21 2,25.969 2,10.477 1,41.463 92.96
Capital 1853.259 1810.577 1605.978 1321.720 477.02
Debt 1613.323 1398.025 1067.841 556.109 678.63
Fixed Asset 566.40 520.70 319.20 192.92 110.73
Net Current 2,251.07 2,279.15 1,959.63 1,350.56 741.81
Investment 613.796 389.203 340.907 282.94 276.48
Current ratio 1.92 1.11 1.17 1.30 1.00
Debtors ratio 3.56 5.52 5.71 4.21 3.88
Inventory
turnover ratio
22.46 538.49 1263.64 28.82 53.86
Profit margin 1.27 4.45 5.58 5.94 6.04
Earnings per
share
2.63 16.93 15.77 10.91 8.69
Dividend payout
ratio (%)
40 70 70 50 50
Return on total
capital
employed
14.20 17.99 17.12 14.83 13.59
P/E ratio 62.88 3.59 12.68 13.10 15.98
Dividend yield
(%)
0.48% 2.3% 0.7% 0.69% 0.72%
Total debt to
equity
1.43 0.42 0.67 0.77 0.87
Uni-Dimensional:
IVRCls revenue has increased by 10% over previous year in 2010, but the increase in
revenue has not lead to increase in the net profit of the company. The net profit of the
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company has decreased by 68%. The increase in the debt can be compensated by increase in
the investment means company has utilised its debt to invest. Current ratio by remaining
same for past few years now has increased to 1.91 but still it is average than the industry
average. The company has worked on inventory management and has significantly reduced
its inventory turnover ratio. The P/E Ratio which shows that how many times the market
price of the stock is with EPS is 62.88, which means the current market price of the companyis costlier.
LANCO Infratech
Lanco Infratech Ltd is one of Indias top
business conglomerates and among the
fastest growing. Lanco Infratech has
subsidiaries and divisions across a
synergistic span of verticals. These
include Construction, Power, EPC,
Infrastructure, Property Development, and
Renewable. Lanco Infratech projects,
operational and underway, are spread
across India. A member of the UN Global
Compact, Lanco Infratech is recognizedfor its Good Corporate Governance and
Corporate Social Responsibility initiatives led by the Lanco Foundation. A preferred
employer, Lanco Infratech builds on a tradition and culture where trust comes first and the
credo is inspiring growth.
Lanco is fast emerging as one of the leading private sector power developers in India with
2087 MW under operation, 8468 MW under construction, and 1039 MW of projects under
development. Lanco's Vision for 2015isto build a High Performance Organisation with an
operating capacity of 15000 MW in Power.
Indian
r
ters
23%
F
reign
r
ters
45%
FII 's
1
%
General
public
3%
Ot
ers
10%
Share Holding
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Uni-dimensional analysis of Lanco Infratech (`. In Cr.)
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06Revenue 5998.214 4097.647 1603.625 553.399 152.738
Net profit 486.382 264.868 200.176 73.061 9.760
Capital 3160.64 1861.51 1593.10 1379.193 87.515
Debt 2733.748 1343.143 552.867 159.513 52.711
Fixed Asset 432.334 387.647 26.024 80.597 12.313
Net Current
asset
2067.92 859.30 232.18 115.54 1.64
Investment 3394.114 1957.71 1653.550 1342.649 126.284
Current ratio 1.61 1.31 0.90 1.06 0.96
Debtors ratio 3.39 4.65 4.16 4.55 3.67
Inventory
turnover ratio
13.16 9.67 10.01 11.35 12.58
Profit margin 8.10 6.46 12.49 13.20 6.39
Earnings per
share
2.04 11.91 9.00 3.29 3.17
Dividend payout
ratio
NA NA NA NA NA
Return on total
capital
employed
15.57 16.90 15.39 7.93 14.72
P/E ratio 26.22 1.24 4.32 4.92 NA
Dividend yield NA NA NA NA NA
Total debt to
equity
0.89 0.72 0.35 0.12 0.60
Uni-Dimensional Analysis:
Lancos Revenue has grown with a CAGR of 765% over last five year, which means the top
line has shown significant growth over the period. Again the bottom line means the net profit
has increased proportionally with the revenue. The capital has almost doubled because of the
increase in the reserve of the company. Company has increased its debt almost double.
Companies EPS has come down to 2.04 against 11.91 in 2009. It has not given dividend to
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share holders. Company has
maintained D-E ratio below one
which shows that company is
solvent.
Nagarjuna construction:
NCCs range of business verticals
comprising of Buildings & Housing,
Transportation, Water &
Environment, Irrigation, Power,
Electricals, Metals, Oil & Gas and International business reflect an expertise positioned to
capture every infrastructure upturn. NCC has a reputed record of completing projects on time
without compromising on quality and is the only construction company in India to achieve
the recognition as one of the 250best under a billion listed companies in Asia Pacific in
2005 by Forbes Asia.
In the current year, the company has so far secured orders aggregating ` 2023 crores and the
OrderBook stood at ` 16051 crores as at the end of the quarter.
Uni-dimensional analysis of Nagarjuna Constructions (`. In Cr.)
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Revenue 4854.26 4358.11 3594.04 2967.37 1966.51
Net profit 232.62 153.86 161.95 115.66 103.90
Capital 2245.66 1685.55 1572.38 1039.03 945.14
Debt 1530.19 1243.88 893.83 1140.32 462.88
Fixed Asset 553.81 459.22 519.69 404.32 184.94
Net Current
asset
237.44 1701.84 1367.45 1278.70 1124.44
Investment 941.17 740.25 564.80 476.76 87.71
Current ratio 1.13 1.03 1.02 1.35 2.29
Debtors ratio 4.11 4.38 4.79 6.50 7.46
Pr ters
20%
FII
34%
Mutual
Funds
23%
B dies
C rpt.
23%
Share holding
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Inventory
turnover ratio
6.63 5.80 6.71 7.65 4.75
Profit margin 4.80 3.64 4.60 4.00 5.62
Earnings per
share
9.07 6.72 7.08 5.55 10.06
Dividend payout
ratio
65 55 65 60 80
Return on total
capital
employed
16.36 16.18 17.71 14.21 13.81
P/E ratio 17.92 9.21 3.008 28.63 17.96
Dividend yield
(%)
0.60 1.8 0.61 0.755 0.88
Total debt to
equity
0.68 0.74 0.57 1.10 0.49
Uni-dimensional Analysis:
Nagarjuna constructions revenue has grown with a CAGR of 29% over last five years. Net
profit has also increased with a CAGR of 25% over last five year. Companys debt has
increase over last year by 23%. Again fixed asset and investment has increased over last year.
Current ratio also has not changed significantly, which shows that company efficiency in
managing the liquidity effectively. The inventory turnover ratio is also very steady and
competitive. The EPS has increased from Rs. 6.72 to Rs. 9.07.
Era Infra Engineering
Ranked second as fastest growing infrastruction company in 2009, Era Infra Engineering is
promoted by Mr. H.S. Bharana, a civil
engineering professional with almost
three decades of experience in the
infrastructure business and a recognised
thought leader in nation building. The
company was established in 1990. The
companys business is of construction of
Power plans, Highways, Railways,
Airports, Urban Infrastructure,
Refineries, Industrial Complexes,
Commercial and Office buildings,
Residential complexes. Era has grabbed
a prestigious road construction project
from National High Authority of India
Indian
Pr ter
5
%
Inst.
Invest rs
11%
Privatee
! r " rate
# dies
25%
$ enral
Pub lic
5%
S are l i g
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(NHAI). AndEra Infra bags BHEL project.
Uni-dimensional analysis of Era infra (` In Cr.)
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Revenue 3604.65 2564.49 1532.52 784.97 313.27
Net profit 279.41 202.61 121.37 79.12 27.15
Capital 1456.49 867.87 489.59 304.96 240.21
Debt 2482.03 1796.35 1447.09 814.03 89.07
Fixed Asset 1380.03 1097.56 537.68 226.50 94.38
Net Current
asset
2174.68 1287.10 1008.06 623.81 219.18
Investment 285.26 176.14 218.49 125.20 12.55
Current ratio 4.05 0.86 1.02 1.81 1.38
Debtors ratio 4.12 4.10 4.56 4.99 4.43
Inventory
turnover ratio
3.76 3.57 3.90 3.65 7.57
Profit margin 8.12 8.41 8.20 10.23 8.69
Earnings per
share
15.59 14.11 52.53 42.51 14.58
Dividend payout
ratio
20 20 20 20 20
Return on total
capital
employed
15.38 16.19 15.62 14.03 15.39
P/E ratio 14.41 4.98 2.35 1.44 4.03
Dividend yield 0.62 0.568 1.68 3.24 3.396
Total debt to
equity
1.70 2.0 3.10 2.80 0.39
Uni-Dimensional Analysis:
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Era Infra Engineering has shown revenue growth of CAGR of 210 % for last five years,
which is the very significant increase in the revenue. Net profit has increased by almost 38%
over 2009. The debt equity ratio has come down from 3.10 to 2 to 1.70 but it is not because it
has decreased its debt, it is because it has increased the capital over last three years time.
Current ratio of Era was good till 2009 but in 2010 it has increased to 4.05 because increase
in the allocation in to current asset. P/E ratio has increased from 4.98 to 14.41 though there isno decrease in the earning per share; it shows that the stock is overvalued compare to last
years valuation. If anyone had invested ` 100 last year in this company one would have
earned `220 this year
Multy-Dimensional Analysis (` in Cr.)
Particulars GMR IVRCL Lanco Nagarjuna Era
Revenue 152.32 5507.784 5998.214 4854.26 3604.65
Net profit 13.45 70.21 486.382 232.62 279.41
Capital 5,840.02 1853.259 3160.64 2245.66 1456.49
Debt 2,575.00 1613.323 2733.748 1530.19 2482.03
Fixed Asset 23.71 566.40 432.334 553.81 1380.03
Net Current 2,130.33 2,251.07 2067.92 237.44 2174.68
Investment 6,252.50 613.796 3394.114 941.17 285.26
Current ratio 2.51 1.92 1.61 1.13 4.05
Debtors ratio 4.08 3.56 3.39 4.11 4.12Inventory turnover
ratio
1,038.00 22.46 13.16 6.63 3.76
Profit margin 8.33 1.27 8.10 4.80 8.12
Earnings per share 0.04 2.63 2.04 9.07 15.59
Dividend payout
ratio
NA 40 NA 65 20
Return on total
capital employed
0.81 14.20 15.57 16.36 15.38
P/E ratio 1558.75 62.88 26.22 17.92 14.41
Dividend yield NA 0.48% NA 0.60 0.62
Total debt to equity 0.44 1.43 0.89 0.68 1.70
Multy-dimensional Analysis:
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The comparison of financials of five companies shows that highest revenue as well as net
profit is of Lanco Infratech. The net profit to revenue ratio shows that GMR have the highest
return on income, followed by Lanco Infratech, and then Era infra engineering. The capital
base of the GMR is largest in all five companies, which is justified by largest allocation to
investment. The short term liquidity position is strong for Era infra engineering (it is 4.05)
but it shows that the mismanagement of current asset and liabilities. GMR have the idealCurrent ratio which is 2.51 followed by IVRCL which is 1.91. All the five companies are
managing their receivable very efficiently because the debtors turn over period does not cross
the 5 day mark in any of the case. But if we see the inventory turnover ratio it is very high in
case of GMR but all other companies are doing well, the inventory turnover ratio is very
competitive in the case of Era infra engineering. Net profit ratio also goes in favour of GMR
which is 8.33 which means out of`100 net sales every `8.33 is net profit, Lancos net profit is
again good i.e. 8.10.Era infra engineering is ahead of everyone in maximising the
shareholders value, it is the most levered company out of all five, it has taken highest debt
proportionate to the capital all other companies have, Then followed by Nagarjuna
Construction which has earned ` 9.07 per share 2009-10.
Conclusion:
This sector has good growth potential, as government emphasising on development of
infrastructure which directly boost to the construction sector.