How do developed and undeveloped countries differ from each other? How does Mumbai differ from the forests of Uttarakhand? The answer is construction. People define infrastructure to mean different things. It includes roads, bridges, airports, railways etc.
In case India wants to become one of the biggest Gross Domestic Product countries (GDP), it is essential to have the development of infrastructure and the construction industry. In this article, we talk about the construction sector, the pros and cons of investing in this sector and the best construction stocks.
Overview of the construction industry
In India with the increasing population, there is a demand for more housing facilities, more water treatment plants, more power generation and transmission plants, better roads and bridges, more schools and hospitals etc. Along with that old infrastructure also needs to be upgraded.
With the government spending a lot on infrastructure projects and private firms helping in this effort, the construction companies have their order books busy for some years ahead. Under the Nation Infrastructure Pipeline(NIP), projects worth 1.3 trillion dollars are at different stages of completion and implementation.
Why invest in construction stocks?
Government push: There is a substantial money outlay by the Indian government in order to promote the growth of infrastructure across India. In the provisional estimates for 2024-25 budget, the government set aside ₹11.11 lakh crore for capital expenditure which is approximately 3.4% of the Gross Domestic Product. In the same financial year, the government plans to construct National Highways covering an extent of 20,000 km.
These are just some of the many policies and initiatives of the government to boost the construction sector in our country.
Also Read: PM Narendra Modi launches historic infrastructure projects worth ₹1 lakh crore
Economic development: The economic growth of a country and its construction sector move hand in hand. When an economy grows and incomes rise, people and businesses need infrastructure, this gives a push to the construction sector.
This demand for infrastructure is fulfilled by the construction companies and this in turn leads to more economic growth, and this becomes a self-reinforcing cycle.
Growing population: After China, India is now the most populated country in the world. Currently, the only country with approximately 1.45 billion people is India, and this number is expected to reach approximately 1.7 billion in the 2060s. There is a need for more and more products such as housing, schools, power, water, healthcare facilities, etc. considering the people and population pressure.
This is enough to keep the construction sector busy for a few decades.
FDI interest: With supportive government policies, rising incomes and growing demand, MNCs want to sell their products and services in India. They also want to benefit from the Indian business landscape.
As a result of this from April 2000 to September 2023, the construction sector in India attracted 26 billion U.S. dollars in foreign direct investments (FDI) for construction development. Another 32 billion U.S. dollars went into construction activities.
Key consideration before investing in construction sector
Regulatory and Bureaucratic challenges: Indian construction companies have to go through complex regulatory processes that involve land acquisition, permissions, disparity in regional rules, etc
These problems reduce the ease of doing business and delay project timelines. Corruption and non-transparent bureaucratic involvement also make this sector a complex investment avenue.
Labour shortages: Construction involves a lot of skilled labour. People with expertise are required to complete these processes but there is a big shortage of skilled workers in India. Training new people is a time consuming and expensive process.
Cost and time overruns: Projects of such large scale often face various hurdles.
Increase in prices of raw materials, labour strikes, environmental concerns, local protests are some of the reasons that lead to cost overruns for these companies and early monsoon, late approvals etc. lead to time delays.
Market volatility and competition: Construction sector has a lot of big players both listed and non-listed and both public and private companies. These are cash rich companies who bid for tenders. Sometimes this bidding process brings down the profitability of these companies.
Unforeseen economic events like interest rate hikes, fiscal tightening, etc also affect these companies adversely.
Also read: Fiscal policy and interest rate: What’s the link?
5 best companies in construction sector
Here are the 5 best construction stocks in India in terms of market capitalization as on November 21, 2024:
- NCC: With a presence of over four decades NCC has undertaken many construction projects like buildings, transportation, mining, railways, etc. This company received orders worth ₹35 billion in the July – September period in 2024. This company has completed various mega projects like airports, stadiums, campuses for medical and engineering colleges, highways etc.
- National Standard Ltd: This construction company has been a part of Lodha group since 2011. This company is engaged in the business of real estate development. The company has been working on a residential project named Lodha Grandezza in Mumbai.
- Mahindra lifespace developers Ltd: This company constructs residential spaces and business complexes. This company has completed 21.24 million square feet of residential development by the second quarter of FY25 across 9 Indian cities. This company has completed 53 projects.
Also read: Unlocking your investment potential: Residential vs commercial properties
- Man Infraconstruction Ltd: This company is involved in the business of constructing ports, roads, commercial & industrial and residential buildings. This company has delivered north of 50 infra projects by 2024 since its inception in 1964. This company also builds luxury residential projects.
- PSP Projects: PSP is involved in the construction of industrial ,institutional and residential real estate projects. The flagship project this company is currently undertaking is the Surat diamond exchange. In a recent turn of events, Adani Infrastructure has signed an agreement to buy a 30.7% stake in this company on November 20, 2024.
Financial performance for the aforementioned companies in FY2024:
| Fundamental metrics (In ₹ Cr) | NCC | National Standard | Mahindra Lifespace | Man Infra | PSP projects |
| Market Capitalisation | 17,764 | 8,862 | 7,190 | 6,584 | 2,417 |
| Sales | 20,845 | 21 | 212 | 1,263 | 2,462 |
| Expenses | 19,076 | 18 | 383 | 937 | 2,200 |
| Profit before tax | 1,061 | 20 | 54 | 397 | 170 |
| Net profit | 740 | 15 | 98 | 303 | 124 |
| RoE (%) | 11.4% | 5.85% | 4.66% | 24.1% | 14.4% |
Bottomline
If you are looking forward to investing in the best Indian construction stocks this can be the best time considering the rising demand for infrastructure in India.
Always remember that this sector often faces challenges of various magnitudes. So always conduct an in-depth analysis of the companies you want to invest in. Past performance does not guarantee future returns.
FAQs
1 – Which is the biggest construction sector company in India ?
As on 21st November 2024, NCC has become the largest construction company in India with a market cap of ₹17764 crores. In FY24, the company also recorded the highest revenue and net profit among all the construction firms in India. This corporation undertook various turned out may seeking efforts consisting of wide ranging highways to include college campuses to airports..
2 – Name top 5 construction companies of India ?
Compared by market capitalization (on November 21, 2024) the top 5 companies in the construction sector are – NCC, National standard, mahindra lifespaces, man infra and PSP projects. These five companies did a combined revenue of ₹24,803 crore.
3 – Which is the biggest construction company in the world ?
China State Construction Engineering Corporation ( CSCEC) is the largest constructor in the world by revenue in CY23. It generated 320 billion U.S. dollars worth of revenue in 2023. In fact, among the world’s largest construction companies, the top 6 belong to China.
4 – Which construction sector stock is the best long term investment ?
If you want to invest your money for the long term in construction space, then NCC can be a good choice. Because this company has a big order book of ₹52,370 crore as of the second quarter of the current financial year.
5 – Which construction stock pays the highest dividend ?
Man Infraconstruction ltd. has a dividend yield of 0.91% as of Q2FY25 which is highest among its peers. This company is involved in construction of luxury residential real estate in India.
