Construction Sector: Building up a new Indian economy

The Indian construction industry ranks third among the 13 major economic sectors and is the second-largest job creator after agriculture.

The Indian construction industry includes the real estate, infrastructure, and urban development sectors. Residential, office, retail, hotels, and leisure parks are all included in the real estate segment. While the urban development segment includes sub-segments such as water supply, sanitation, transportation, schools, and healthcare, among others. As a result, the construction industry in India operates across nearly 250 sub-sectors, with connections between them.

Construction was one of the industries that had to bear the brunt of COVID-19, as it was already facing a liquidity crisis. Because of a lack of funds, many projects remained unfinished. The Covid pandemic caused havoc on the entire value chain system at all points and scales. The availability of construction materials and price inflation became major issues. Due to lockdowns, a lack of timely execution contributed to cost overruns, significant delays, and even project cancellation.

The real estate sector is one of the most well-known and crucial sectors for economic growth. The demand for commercial and residential properties drives the growth of this sector. Demand has increased as a result of rising household income and urbanization.

If everything goes well, the real estate sector is expected to reach USD 1 trillion in market size by 2030 and is expected to register a CAGR of nearly 15%. It will contribute 12-15% to the country’s GDP by the year 2025. The Infrastructure in India is estimated to grow at a CAGR of approximately 7% during the forecast period. Government plans to invest a whopping amount in infrastructure projects by the year 2024-25.

Outlook 

Numerous events are taking place in India that will help the real estate and construction industries grow in the near future. The total budgetary allocation for FY 2022-23 is Rs 76,549.46 crore for the Ministry of Housing and Urban Affairs and Rs 67,221.12 crore for the Department of Drinking Water and Sanitation.

The government's flagship initiative, the Pradhan Mantri Awas Yojana (Urban), which was launched in June 2015, aims to provide housing for all in urban areas by 2022. To make the market more accessible to small and retail investors, the Securities and Exchange Board of India has reduced the minimum application value for Real Estate Investment Trusts (REITs) from Rs 50,000 to Rs 10,000-15,000. As a result, home sales volume in seven major Indian cities accelerated by 113% year-on-year in the third quarter of 2021. Private equity investment inflows into India's real estate sector totalled USD 3.3 billion in the first half of FY21-22. The top three cities – Mumbai (39%), Delhi (19%) and Bengaluru (19%), together attracted nearly 77% of the total investments.

The government's Smart City Project, which aims to build 100 smart cities, represents an excellent opportunity for real estate firms. Under the Smart City Initiative, 100 cities have proposed an investment of approximately Rs 2 lakh crore. In addition, 11 industrial corridors, the redevelopment of 600 railway stations, and the expansion of railway lines are some of the sector's major growth drivers.

The Prime Minister has launched the Gati Shakti Master Plan to integrate various modes of transportation and accelerate infrastructure development in India. The Prime Minister stated during the Virtual Global Investor Roundtable that India has an ambitious plan to invest USD 1.5 trillion through the National Infrastructure Pipeline.

Financials

To gain a financial overview of the construction sector, we have analyzed 69 major companies. Larsen and Toubro Ltd, DLF Ltd and Macrotech Developers Ltd were the top three companies in terms of market capitalisation. Larsen and Toubro, an Indian multinational conglomerate company has a huge market capitalisation of Rs 2,30,127.66 crore.

FY22 was a good year for the Indian construction sector. The benchmark indicator BSE Realty has also witnessed a growth of nearly 40% during FY22. Most of the companies, after recovering the prior losses, posted positive growth numbers YoY in terms of revenue, EBIDTA and PAT. During FY22, the total net sales of these companies jumped by 13.60% as compared to FY21 whereas the total operating profit declined by 6.24% YoY. Total net profit surged 29.02% YoY.  

The major contributors to this commendable growth were Larsen and Toubro Ltd and Prestige Estates Projects Ltd as these companies recorded a net profit of Rs 10,291.05 crore and Rs 1,231.30 crore, respectively. On the flip side, Sterling and Wilson Renewable Energy Ltd and GMR Infrastructure Ltd were sector draggers as companies incurred a huge loss of Rs 915.76 crore and Rs 823.01 crore, respectively.