Construction industry in India is highly fragmented. There are number of unorganised players in the industry which work on the subcontracting basis. Construction activity being labour intensive, construction companies have been focusing on mechanisation over past few years. Consequently, growth in quantum of labourers required has declined from 1.6% in FY 04 to 0.9% in FY 08. Mostly all projects in Construction industry are working capital intensive.

Construction industry expected to witness effective investment over Rs. 10,000 bn during the 11th five year plan Construction is the second largest economic activity in the country next to agriculture. With its backward and forward linkages, Construction industry has generated employment for 33 mn people in the country. In FY 08, Construction sector contributed about 8.5% to the country’s GDP. Over past 3 years, construction as a percentage of GDP has increased from 8.0% in FY 06 to 8.5% in FY 08. The multiplier factor between growth rates of construction and GDP has been about 1.5X-1.6X.

Construction project can be materialised through number of small contracts which mainly depend upon size of the project and diversified nature of activities to be carried out in the project. As a result, subcontracting is a common phenomenon in the construction industry. Some complex infrastructure and industrial projects call for specific expertise which a single contractor may be inept to execute. As a result, industry is witnessing rising joint ventures which help contractors to share professional and technological expertise.

Cost structure of the construction industry is dominated by raw material cost and subcontracting cost. Raw material cost which is the major cost accounts for 30-50% of the total cost and subcontracting cost accounts for about 20-40%. Cost structure of a particular construction company also depends on its order mix. This is because construction projects from different sectors require varied level of raw materials and subcontracting work. Major raw materials consumed by construction industry mainly include cement and steel. Almost all domestic cement consumption is attributed to the construction industry.  Steel requirements of the construction industry prominently includes long products like reinforcement bars/rods, structurals and galvasnized steel. Consumption of steel by construction industry has grown of 16.1% over past 5 years whereas cement consumption has registered  of 9.6%. Unprecedented rise in prices of these two raw materials has a direct impact on the cost of the project and in turn margins of construction companies. Profitability also depends upon the diversity of the projects a company can execute. Companies having strong presence in segments like power and industrial segment which are complex to execute, tend to enjoy higher margins.

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