七妹导航

The domestic mining and construction equipment (MCE) industry has staged a smart recovery since late June 2020, posting a year-on-year (y-o-y) growth of 20-22 per cent in Q3 CY2020. Though growth is still lower by 14 per cent compared to Q3 CY2018 levels, it is significant considering the deep demand contraction of ~40 per cent in H1 CY2020.

As per ICRA鈥檚 update, demand for the all-purpose backhoes recovered much faster than demand for other equipment like excavators. Supporting factors like strong project awards in the road sector, timely release of payments to contractors for all Central Government projects and a few state projects (in North India); and a strong rural demand (for agriculture and housing) aided the recovery. The ratings agency in May 2020 had estimated a sharp 15-20 per cent decline in industry volumes during CY2020. But, considering the demand revival since July 2020 and the continued market momentum in November 2020, substantiated by dealer check-ins, the decline now is estimated (revised) to be lower at 12-14 per cent. And, it expects the next year, CY2021 to witness a healthy volume growth of more than 20 per cent.

Pavethra Ponniah, Vice President and Sector Head, ICRA said, 鈥淭he MCE industry鈥檚 recovery in H2 CY2020 is steeper than expected. Our channel check with dealers has indicated that strong footfalls and conversions continue in November 2020. However, sustainability of volumes remains a function of underlying economic activity and government finances. Besides, resurgence in Covid-induced urban lockdowns and the prolonged economic weakness running into four quarters will also play their part. Weak state finances have impacted state capex which accounted for ~40 per cent of the total outlay of the country. This is a significant demand driver.鈥�

CY2021 likely to witness more than 20 per cent volume growth,

The key MCE demand drivers will be Central Government projects, particularly roads and rural demand, and

Demand sustainability will depend on underlying economic activity and government finances.

Demand trend

The key MCE demand drivers in the current market are Central Government projects, particularly roads and rural demand. Healthy awards and execution rates of road projects by the NHAI has boosted volumes of backhoes and excavators, more recently. Pick-up in regular funds flow from the Central Government continues to support volumes. However, new state projects have not taken off as most states are struggling with fiscal bandwidth. On the other hand, healthy volumes in the agri-segment besides heightened activity under the PMAY and the PMGSY are the primary cause for rural demand.

In view of the ratings agency forecast of a GDP contraction of 11 per cent in FY2021, it remains to be seen whether the industry鈥檚 Q3 CY2020 demand revival continues or abates. This, given the fact that the overall infrastructure activity is still negative due to weakness in infrastructure and real estate activity. This subdued trend is worrying, given the crucial role of capital expenditure in reviving economic activity.

State governments contribute 37-45 per cent to the country鈥檚 infrastructure spend annually. Of this about 23-24 per cent of the capex is on roads and irrigation. The pandemic has significantly slowed down the state鈥檚 tax revenues as well as spending.

Despite raised borrowing limits, ICRA expects the states to face a sizeable revenue shortfall in FY2021. To bridge this, the states will have to resort to severe cuts in capex spend. Healthcare spend and other social requirements during FY2021 and FY2022 would take priority.

Construction activities in rural areas, including expenditure on irrigation and housing, have been a key demand driver for construction equipment since the pandemic.

Government programmes (including direct benefit transfers and MNREGA), healthy agricultural cash flows, stable government supported crop prices, healthy monsoons and high reservoir levels, favourable kharif crop outlook; and adequate labour availability 鈥� all of which has led to recovery in the rural economy, even as urban demand continues to languish.

The CE assets under management (AUM) of NBFCs declined in FY2021 (they have contracted during the past five quarters), due to a fall in demand and increased competitive pressures from banks. On the positive side, the pick-up in equipment utilisation rates has abated asset quality pressures to an extent in Q2 FY2021. While most dealers opted for the first moratorium, with the pick-up in demand in Q2 FY2021, dealers did not opt for the second moratorium.

Outlook still negative

Despite the volume uptick since late June-July 2020, ICRA has maintained a negative outlook on the sector as demand sustainability is uncertain. A prolonged economic slowdown triggered by the pandemic, the government鈥檚 limited fiscal bandwidth for investments and the risk of Covid resurgence leading to further lockdowns and construction disruptions are not ruled out.

Ponniah adds, 鈥淎lthough the MCE industry鈥檚 medium-term demand outlook remains favourable, given the need for continuing investments in infrastructure investments, demand for CE is typically highly cyclical in nature, experiencing deep troughs and sharp peaks. The ability of the players to successfully navigate through these cycles is critical.

Though the Indian industry鈥檚 contribution to global volumes is miniscule, it has attracted global majors, given its strong potential, and thereby heightened competition. The MCE market is highly price-sensitive and, therefore, the ability to identify and launch India- relevant products at competitive prices is critical for MCE industry growth in India.鈥�