Essay: Data analysis: overseas construction market

DATA ANALYSIS
OVERVIEW
The following chapter mainly comprises of the analysis of the data extracted from annual reports. Each variable that was collected is analysed individually (univariate analysis) with the aid of histograms and bar charts. The relationship between some of these variables have also been analysed (bivariate analysis). Finally, the performance and efficiency of Indian construction companies were measured against that of the selected global construction companies by comparing the company profiles.
5.2 Data Analysis
This section comprises of univariate analysis, bivariate analysis and a comparison of Indian construction companies to a selected set of global construction companies. The univariate analysis section comprises of the analysis of variables such as total revenue, profit margin(%), debt-equity ratio, international involvement (in terms of countries and projects) and national involvement (number of regional offices). The measures of central tendency and dispersion, as well as scatter and column charts, are used to aid analysis. The bivariate analysis section investigates the relationship of revenue with number of countries, debt-equity ratio with number of international projects, and the profit margin with the number of international projects.
5.2.1 Univariate Analysis
In order to conduct a descriptive univariate analysis, two types of statistics are calculated. They are measures of central tendency and measures of dispersion. The calculated measures of central tendency include the mean and median, while the calculated measures of dispersion include range and standard deviation. These measures are calculated for each variable in order to aid the description of the acquired data. These values are supported by scatter charts. Additionally, a comparison of revenue, profit margin and the debt to equity ratio is made of, between Indian construction companies who have an overseas presence and those that do not.
5.2.1.1 Total Revenue
Table 5.1 shows the calculations of the mean, median, range and standard deviation for the values of the total revenue that were acquired from the companies.
Table 5.1 Total revenue
Mean
57259.68
Median
20974.62
Range
1113981.50
Standard Deviation
127854.41
The measures of central tendency include the mean and median. The average annual revenue for Indian companies are around 57259.68 million rupees and the median value is 20974.62. In this case, the mean revenue is over two times that of the median value. This indicates that there are a number of companies that have a revenue that is far higher (outliers) than the norm. The measure of dispersion reinforces this finding as the both the standard deviation and the range of values are much higher than the mean and median values. This indicates that a number of values for the total revenue tend to stray away from the mean value. Therefore, it can be argued that, due to the large values of standard deviation in comparison with the mean, some Indian construction companies dominate the construction market in terms of their net annual income.
Figure 5.1 is a graphical representation of the range of values that were acquired for the total revenue. The outliers can clearly be spotted on this chart. There are some companies that had a total revenue of over 500,000 million rupees. That is roughly over ten times that of the mean revenue and around twenty-five times the median value.
Therefore, it can be concluded from the table and the chart that there is very little parity among these construction companies in terms of their total annual income. In other words, a small number of companies dominate the Indian construction market.
Figure 5.1 Spread of total revenue
5.2.1.2 Net profit margin (%)
Table 5.2 Net profit margin (%)
Mean
2.85
Median
4.09
Range
192.48
Standard Deviation
22.04
The second independent variable that was analysed was the annual percentage of profit margin. The values calculated for the mean, median, range and standard deviation are shown in table 6.2.1.2. The mean profit margin for the companies that were studied is only 2.85% while the median has been found to be 4.09%. On the other hand, the range value clearly indicates that there is a massive difference between the companies generating the highest profit margins and those generating the lowest ones. The value for the standard deviation is also large, thereby indicating that there are a number of companies that have profit margins far higher and lower than the aforementioned mean value. A high standard deviation also suggests that while there are companies that have excellent net profit margins, there are also other companies that have incurred losses over the given time period.
A scatter chart was used to represent the range of values for the net profit margin of the companies that were studied. Figure 5.2 clearly shows that there is a significant amount of dispersion. It also illustrates that there are a number of companies that recorded healthy profit margins; while the majority of the companies recorded a profit margin below 10%. However, the mean value was low because a number of companies registered losses. Two companies registered losses less than -100%. One of the biggest problems with not registering sufficient profits is that it turns away a number of potential investors. Not turning out profits also strains the ability of a company to pay off both its’ long term and short term debts. A company that generates sufficient profits is generally considered efficient. Expanding into overseas markets can cause drops in efficiency as well. Therefore, Indian construction companies may need to focus on improving their operational efficiency before expanding into overseas markets.
The lack of profitability of some of these companies may come down to what they focus on. After studying the total revenue and the net profit margin, the observation that can be made is that a large number of construction companies in India concentrate on generating large revenues, rather than increasing their profit margins. This emphasis on generating revenue may need to be shifted, in order for companies to become more efficient businesses.
Figure 5.2 Spread of net profit margin (%)
5.2.1.3 Debt-Equity Ratio
Table 5.3 Debt-Equity ratio
Mean
4.27
Median
3.19
Range
93.72
Standard Deviation
8.68
It would be of interest now to find out whether Indian construction companies fund their growth consistently with debt. The mean, median, range and standard deviation of the values of the debt-equity ratio have been provided in table 5.3. The mean value has been found to be 4.27. This indicates that on average these companies have not been heavily functioning on debt. There is also a massive difference between the highest and lowest values of the debt-equity ratio. The standard deviation is almost double that of the mean, thereby suggesting that there are a number of values that stray away from the mean.
The dispersion of the debt-equity ratio for the investigated companies has been graphically represented in figure 5.3. It indicates that there are some companies that have a debt-equity ratio that is greater than twenty, as well as ones that have a negative debt-equity ratio. However, a vast majority of the companies have ratios below ten. The negative debt-equity ratio arises from companies having negative shareholders equity. This is another factor that may put off potential investors. Having high debt-equity ratios, also ensure that it is harder for companies to obtain loans from banks and other lenders, because it indicates that they have struggled to repay their debts. This in turn could reduce the size of the capital that they have, to work with. A decrease in the available working capital hampers the level of performance of these construction companies.
The problem with functioning on a large amount of debt is that it puts the entire company at risk. If the company is unable to make debt payments, it may result in a loss of assets. It is also very difficult and dangerous for a company to expand its operations if it has a large amount of liabilities. This may be one of the primary reasons why some Indian construction companies choose not to venture into the global construction market.
Figure 5.3 Spread of debt equity ratio
5.2.1.4 International Involvement (Countries)
Table 5.4 International Involvement (Countries)
Mean
4
Median
1
Range
61
Standard Deviation
9.94
The number of countries in which each construction company has a presence in has been calculated. The mean number of countries that companies operate in is 4. However, the median value is only 1. This can be explained by the scatter chart that represents the number of companies. It is observed that a large number of companies are not operational in any countries outside of India, thereby significantly reducing the value of the median. There are three companies that are operational in over twenty countries. This may be the reason why the range and standard deviation values are large. The rest of the companies that have a presence overseas are generally operational in less than ten countries.
Additionally, most of the companies that have a presence outside of India are operational in roughly the same geographical areas. The most common region where Indian construction companies have been found to operate in, is the Middle East; in countries such as Oman, UAE, Qatar and Kuwait. A number of companies are also present in South East Asia, in countries such as Malaysia and Indonesia. Some companies have also expanded their reach to Africa in countries such as Nigeria and Libya. However, very few companies are operational in the US and Europe. This may be due to these companies’ inability to compete with the large companies in these regions. Additionally, it is observed from the data collected that Indian companies seem to target developing countries rather than developed countries.
It is worth noting that some Indian construction companies have international offices, especially those in the residential sector, but no overseas projects. This is primarily so that they can sell their projects to NRIs (Non Resident Indians). It is especially the case in Middle Eastern countries, such as Qatar, Kuwait, Oman and UAE, as a large number of Indians live there.
Figure 5.4 Dispersion of number of countries
5.2.1.5 International Involvement (Projects)
Table 5.5 Number of international projects
Mean
7
Median
2
Range
56
Standard Deviation
12.25
It is not sufficient to simply look at the number of countries in which Indian construction companies operate. The number of overseas projects has just as immense an impact on a company’s financials. Looking at the table, the mean number of international projects is larger than the mean number of countries. This suggests that a number of companies may run multiple operations in some countries which brings about the argument for entering into new markets as they bring about a large number of opportunities. As mentioned earlier, there are a number of countries that have no international presence. This results in these companies having no international projects as well. The standard deviation is also slightly higher for these values than the previous set, thereby suggesting that there is a larger variation in terms of the number of projects than the number of countries which again backs the assertion that, Indian construction companies generally run multiple operations in some construction markets.
The scatter chart for the number of international projects is very similar to the number of international projects, as expected. However, the company operating in the maximum number of countries is not the one that has the largest number of overseas projects. This again points to the fact that some companies choose to focus on specific international regions, rather than widening their global reach.
Figure 5.5 Number of International Projects
5.2.1.6 National Involvement (Number of Offices)
Table 5.6 Number of offices in India
MEAN
5.98
MEDIAN
4
RANGE
21
Standard Deviation
5.48
As mentioned earlier, a number of Indian construction companies do not have an international presence. Therefore, it was decided to investigate their national level involvement by finding the number of offices they had spread across India. This would provide a general idea of these companies’ willingness to expand beyond their base of operations. Table 5.6 shows, the mean values for the number of offices in India was found to be just below six while the median value is 4. This shows that there are a number of companies that operate beyond their base of operations. The range is also relatively high with some companies having over twenty local and regional offices spread across India. The standard deviation is fairly high, suggesting that there are a lot of companies that have a larger and smaller number of offices than the mean value. The large values of dispersion suggest that a small number of companies may dominate the construction market. The scatter chart clearly shows that there are only a handful of companies that have a single office. Five companies have over fifteen regional offices. This raises the question as to why some companies may be willing to expand nationally, but not internationally.
The data obtained clearly shows that most construction companies are willing to expand domestically. This poses the question as to why a significant number of Indian construction companies may be willing and capable of national expansion but choose not to expand into the international construction market.
It is also worth noting that a vast majority of the larger construction companies are based in either Mumbai or New Delhi. Other headquarter areas include major cities such as Chennai, Kolkota, Hyderabad, Bangalore and Ahmedabad. The local and regional offices are also mainly located within these areas. They are located in large cities because there is a much larger demand in both the EPC and residential sector.
Figure 5.6 Number of offices in India
5.2.1.7 Comparison of revenue of Indian construction companies with and without an international presence
Figure 5.7 Revenue of Indian construction companies with and without international projects
Figure 5.7 represents the spread of the revenue generated by Indian construction companies that have international projects, as well as those that do not have international projects. It is clear from the representation that Indian construction companies that venture overseas generally have a larger revenue than those that choose to only compete in the Indian construction industry. It is easier for Indian construction companies with an international presence to increase their total sales because they have access to a larger number of potential clients. The opportunities for expansion within a country will always be limited in comparison with entering the global market, which opens the door to a range of new opportunities. The companies who generate the largest revenue, are those with international projects. Some of these companies, represented by the spikes in figure 6.2.1.7, could possibly be capable of performing at a global level and competing with large multinational construction companies.
It has also been observed that there are a number of companies which generate relatively low revenues, that have ventured overseas for construction. The size of the Indian construction company (in terms of its’ revenue) may not necessarily dictate whether it chooses to venture into foreign countries. Furthermore, it is noted that Indian construction companies who do not have an overseas presence, usually generate relatively low revenues. None of these companies have a revenue exceeding 100,000 million rupees. Conversely, the other set of companies (with international projects) generally have a revenue higher than a 100,000 million rupees mark.
5.2.1.8 Comparison of profit margin of Indian construction companies with and without an international presence
Figure 5.8 Profit margin of Indian construction companies with and without international projects
The spread of the profit margin of Indian construction companies with and without international projects, have been represented in figure 5.8. There are some outliers present in this chart, that show some companies have incurred large losses and others that have made huge profits. The larger fluctuations in profit margin belong to the Indian construction companies that have do not have overseas projects. This includes the lowest profit margins which drop as low as -150%. Conversely, the companies that do have international projects seem to have less fluctuations in their profit margins. This could signify that venturing into the international construction market may have a stabilizing effect on the profit margins of a company. Expansion into foreign markets may cause a decrease in profit margin for certain companies. However, it could also could aid in maintaining a stable profit margin in the long term.
5.2.1.9 Comparison of the debt to equity ratio of Indian construction companies with and without an international projects
Figure 5.9 Debt to equity ratio of Indian construction companies with and without international projects
Figure 5.9 represents the spread of the debt to equity ratio of Indian construction companies with and without overseas projects. It can be seen that a large number of Indian construction companies have debt to equity ratios within the span of 1 to 10. There are some negative values for the debt to equity ratios. These are part of the construction companies that do not have international projects. As mentioned earlier, a negative debt to equity ratio signifies that the shareholders equity is negative, thereby turning away a number of potential investors. In this case, the argument can be made that venturing into overseas markets could protect shareholder’s equity, resulting in the company becoming a more attractive option for potential investors.
On the other hand, the general debt to equity ratio of Indian construction companies with overseas projects seem to be higher than that of the companies that do not have overseas projects. Venturing overseas seems to expose the construction companies to debt. This may be one of the foremost reasons why Indian construction companies do not venture into the overseas construction market.
5.2.2 Bivariate Analysis
Bivariate analysis is used to examine the effects that having overseas operations has on variables such as revenue, profit margin (%) and the debt-equity ratio. Analysing such relationships helps in providing possible reasons as to why Indian construction companies do not expand into the global construction market. For the purpose of this study, the Indian construction companies who do not have projects overseas have been removed.
5.2.2.1 Revenue and number of countries
Figure 5.10 suggests that there is a slight positive correlation between the annual revenue of a company and the number of countries it operates in. This is not surprising as the companies that venture overseas usually have more projects and therefore, a higher total revenue. However, there are some outliers that buck the overall trend. Therefore, the total revenue generated by construction companies in India seems to increase with the number of foreign markets that they enter into. Indian construction companies who are looking to increase their revenue could possibly target overseas markets as the data seems to suggest expansion into overseas market generally results in a large increase in revenue.
Figure 5.10 Total Revenue vs Number of countries
5.2.2.2 Debt Equity ratio and Number of international projects
Figure 5.11 Debt to equity ratio vs number of overseas projects
Figure 5.11 represents the relationship between the number of overseas projects of an Indian construction company against its debt equity ratio. There is a slight negative correlation between the two variables. As the number of projects increases, the debt to equity ratio of the projects decreases. This could signal that companies who have a higher debt-equity ratio generally tend to stay within the country. It is the construction companies that are not highly leveraged that venture overseas for construction. If companies attempt to expand overseas while they are already highly leveraged they would end up in even heavier debt. The companies with the largest number of projects generally have a debt to equity ratio around 5. This could be used as the recommended ‘safe’ value for the debt-equity ratio for companies planning to venture overseas. Therefore, it can be suggested that having too low of a debt-equity ratio could also harm companies ,as it suggests that they are unwilling to spend their profits on expanding their company. As a result, the argument can be made that Indian construction companies need to have a reasonable debt to equity ratio in order to expand into the overseas market.
5.2.2.3 Profit Margin (%) and Number of international projects
Figure 5.12 represents the relationship between the profit margin (%) of a construction company and the number of overseas projects it has undertaken. The graph shows that there is no definite correlation between the profit margin and the number of overseas projects that a company has. However, it is inferred that the companies with the largest number of overseas projects generally have a profit margin between 0% and 10%. There seems to be significant fluctuations in profit margins for companies with a lesser number of overseas projects. It is observed that companies with a stable profit margin (%) generally tend to expand further into the global construction market. The funnel shape of the scatter plot suggests that, the companies that have a larger number of overseas projects generally have stable profit margins that range from 0 to 10%. Therefore, the argument can be made that expanding overseas can help stabilize a company’s profit margins in the long run.
Figure 5.12 Profit margin vs number of overseas projects
5.2.3 Comparison to Global Construction Companies
Appendix B shows the total revenue, net profit, net profit margin (%) and debt-equity ratio for five leading contractors around the world. The financials of these companies are used as benchmarks in comparison to the Indian construction companies who chose to venture abroad. Each variable has been analysed individually for both sets of companies.
5.2.3.1 Total Revenue
Figure 5.13 Total Revenue of Indian and international companies
The line graph above compares the annual revenue of the Indian construction companies who chose to venture abroad, with the selected international construction companies. It is evident from the graph that the Indian construction companies do not generate nearly as much revenue as the global companies. With the exception of a few, most construction companies generate a revenue that is far below the 500000-million-rupee mark. On the other hand, none of the selected global construction companies generate a revenue less than 500,000 million rupees. The difference in revenue generated could be due to the vast number of foreign projects that these companies undertake. Conversely, Indian construction companies may be generating lower revenues due to a lack of projects in the global construction market. Either way it is evident that Indian construction companies need to operate and perform at a much larger capacity if they want to compete with global powerhouses in the construction sector. This improvement in performance can only be brought about by steady expansion into foreign construction markets.
5.2.3.2 Profit Margin (%)
Figure 5.14 Profit margin of Indian and international construction companies
Figure 5.14 shows the spread of the Profit Margin (%) of the Indian construction companies with a presence overseas and the selected international construction companies. It can clearly be seen in the graph that some Indian construction companies operate at a loss. At the same time, a number of companies operate with a profit above 15%. There is no constant profit margin percentage for Indian construction companies that have ventured abroad.
Conversely, the profit margin for the five selected international companies have been found to be roughly constant. The profit margin for these companies varies between 1% and 4 %. Therefore, the argument can be made that a 5% profit margin is sufficient for a company to expand overseas. Figure 5.14 also reinforces the findings in the previous section that a large presence in the overseas construction market can help stabilize the profit margin of construction companies. Conversely, it can be argued that most construction companies only choose to expand if they possess a stable profit margin. From the analysis of the previous two variables, it is observed that the selected international construction companies focus on generating large revenues and maintaining low profit margins, rather than generating low revenues and maintaining high profit margins. This approach could possibly stabilize the profit margin of a construction company in the long term.
5.2.3.3 Debt-Equity Ratio
Figure 5.15 Debt to equity ratio of Indian and international construction companies
Figure 5.15 represents the variation in the debt to equity ratio of the selected international construction companies as well as the Indian construction companies with an overseas presence (an outlier has been removed from this chart for the purpose of the study). The international companies all maintain a debt-equity ratio between 1.50 and 5. Therefore, it can be argued that these companies generally try to minimize their debt even while expanding into the global construction market. It should also be noted that, when the relationship between the debt-equity ratio and the number of international projects were studied for Indian construction companies, it was revealed that the companies with the most international projects generally had a debt-equity ratio around 5. If the debt to equity ratio of such companies were to fall out of this ‘safe’ zone, corrective action would need to be taken such as bringing in more equity.
There seems to be a number of Indian construction companies that seem to be highly leveraged. This could be one of the primary reasons why a number of Indian construction companies do not venture abroad. While there are some companies that have a debt-equity ratio similar to that of the selected international construction companies; the rest of the firms have incurred large amounts of debt. One of the reasons for this, may be that these companies chose to expand while being highly leveraged, thereby increasing their debt. As mentioned before, it is also important to note that a high debt to equity ratio could turn investors away. Operating at a debt-equity ratio that is not too high or too low, similar to the selected international companies, enables companies to attract investors while expanding at the same time.
5.2.3.4 Requirements for venturing into the overseas construction market
From the analysis above a benchmark can be created regarding the financials that should be maintained by construction companies so that they can be successful in the global construction market. It is found to be ideal to concentrate on generating high revenues and maintaining a relatively low yet stable profit margin, just below 5% for companies when venturing into the global construction market. It is also very important that these companies maintain a debt to equity ratio in the 1 to 5 range.
It has already been identified using univariate analysis that Indian construction companies do concentrate on generating high revenues rather than maintaining high profit margins. However, a number of these companies also need to focus on reducing their debt if they are to expand into the overseas construction market.