ICRA: Outlook on CE sector revised to ‘Negative’
Roads have been the primary growth engine for CE demand past three years that contracted in FY2019
Following a sharp correction in unit sales amidst slowing economic growth and infrastructure investments, both by the public and private sector; and tight liquidity environment, ICRA has revised the outlook on the construction equipment (CE) sector to Negative. Demand headwinds are likely to continue in the near-term unless there is a course correction by the public sector which leads to sizable scale up in infrastructure investments directly and through enabling policy measures thereby triggering fresh equipment buying. The sharp volume contraction would exert pressure on earnings and overall credit profile of CE OEMs.
Says Pavethra Ponniah, VP & sector head – corporate ratings, ICRA, “Slow movement in award of road projects during the past several quarters, delays in payment to contractors, continued land acquisition issues and overall tightness in the financing environment has lead to a contraction in fresh equipment buying since early CY2019.”
During CY2018, the construction equipment industry registered a growth of ~30% in unit terms, driven by strong growth in all components, particularly backhoes and excavators. This followed over two years of strong growth since CY2016-17. However, growth started contracting in early CY2019 in the run-up to the general elections. Till August CY2019, industry volumes have contracted by 16% in the key product category of backhoe, excavators and wheeled loaders.
Roads has been the primary growth engine for CE demand in the past three years since CY2016. Road project awards contracted in FY2019. Following the formation of a stable government in May 2019, awards and demand for CE was expected to revive. Despite the increased capital outlay for roads, railways, and metro projects in the recent Union Budget, continued slowdown in project awards, payment delays to contractors, change in the awarding model for road projects and the overall uncertainty in the economy has led to a sharp decline in expenditure on roads during YTD FY2020.
Further, majority of the CE OEMs in India are joint ventures/subsidiaries of global majors. Import content in Indian CE is relatively high, with OEMs importing critical engine, hydraulic and track components, partly from the parent or the parent’s global supply chain. Volatility in the INR and the long lead time for inventory has added to the cost woes of the industry.
“The outlook on the sector could turn Stable if demand environment improves on a consistent basis, with revival in public and private sector expenditure on infrastructure projects. Accommodative public policy and an improvement in buyer confidence would be critical for the same”, added Ms. Ponniah.