New government to propel equipment demand

Infrastructure development expenditure will drive equipment demand

Photo Caption: Infrastructure development expenditure will drive equipment demand

With infrastructure development slowing down in recent months due to general elections, the demand for construction equipments have fallen. Sandeep Menezes looks at the evolving equipment demand scenario post elections.

One of the major demand drivers for the construction equipment market is level of investment in infrastructure development. Infrastructure development has slowed down in recent quarters due to upcoming general elections, also already awarded projects have not been able to take-off. This slowdown in infrastructure development pace has meant that construction equipment segment witnessed demand reduction to the tune of nearly 15 per cent vis-à-vis last year.

The Indian construction industry is one of the most important sectors of the economy as it stimulates infrastructure-building and creates growth opportunities for other industries and economic segments. It is the second largest industry in India after agriculture. Indian construction industry has been contributing 7 to 8 per cent of the nation’s GDP for the past many years. Construction equipment remains crucial to development activity and with mammoth nationwide need for better infrastructure; the equipment market will witness hectic activity over the long term.

Sunil Chaturvedi, MD & CEO – Tractors India Private Limited

Sunil Chaturvedi, MD & CEO – Tractors India Private Limited

Current Demand Scenario:

The central government intends to put $one trillion in infrastructure development during 12th plan period (2012-17). Out of this, it expects roughly $500 billion to be contributed through private sector participation.

With general elections, the last few quarters have witnessed infrastructure construction grinding to a near halt due to projects not being awarded or getting delayed. The private sector is also hesitant to invest due to the prevailing policy uncertainty and formation of new governmental leadership. Therefore since infrastructure developmental activity has slowed down – the demand for construction equipment has dropped in recent months.
Sunil Chaturvedi, MD & CEO – Tractors India Private Limited (TIPL) stated that “unlike the economic slowdown of 2008 which did not significantly impact India since the domestic demand was intact, the subsequent slowdown that occurred in 2012-13 did impact our growth momentum severely; especially in the infrastructure and capital goods space. Quite distinctly, this time the slowdown can be largely attributed to domestic factors including stalled reforms, governance deficit due to major institutional disharmony and acrimony and absence of medium term policy perspective.”

B. Sridhar, Head, SDLG Business, Volvo India Pvt. Ltd

B. Sridhar, Head, SDLG Business, Volvo India Pvt. Ltd

Challenges Facing The Industry:

There has been a delay in commencing of infrastructure projects due to time and cost overruns; added to this is shortage of funds, environmental concerns and delay in Government clearances. Project delays have been caused due to land acquisition challenges, in turn causing major investment deferrals by companies. There is also a lack of structured regulatory and policy framework for PPP models which needs to be addressed.

Lack of environmental norms is another key area of concern that prevents project completion and hinders investment in road building equipment. Moreover, there is a lack of structured regulatory and policy framework when it comes to the PPP framework. Although this model could prove to be a great opportunity for investment, the framework is inconsistent and lacks transparency. The processes related to procurement, awarding of contracts and dispute resolution need to be streamlined.

Currently, the biggest challenge facing the construction equipment industry is poor demand due to lower construction activity. This has led to increased competition and cut-throat pricing. While raw material pricing has been continuously rising leading to nearly all OEMs taking hit on their bottom-line to protect their top-line (market-share).

Another major challenge in the market is fluctuations in raw material or component prices. The prices of the major raw materials used for manufacturing construction equipment are volatile and tend to increase year-on-year, posing a negative impact on the profit margin of OEMs.

The current high interest rate results in borrowings becoming very high. Being a highly capital intensive sector, construction equipment industry is getting adversely impacted. In addition the private finance company’s strategic & cautious approach for new entrants also toughens the eligibility criteria for equipment financing.

Since the recent Rupee depreciation has made imports expensive – it has been a challenge to those equipment manufacturers who fully import or have high percentage of imported components in their products. On the other hand, it has made domestically manufactured products cheaper vis-à-vis imports thereby providing further incentive for OEMs to manufacture locally and giving India-made products a boost.

Igor Palka, CEO - bC Expo India Pvt. Ltd

Igor Palka, CEO – bC Expo India Pvt. Ltd

Growth Accelerators:

The Construction Industry demand is driven by the health of the economy and the infrastructure investments.

The Indian construction industry will continue to grow at a rapid pace largely due to investments in infrastructure & urbanization.

With a population of over 120 crores, the country needs to invest on basic infrastructure like power, highways, water, sewage etc. India is placed significantly below high growth economies such as China, and developed economies like United States in terms of infrastructure.

The government is now focusing on bringing these gaps through large investments of $one trillion for the current five year plan, this doubles the estimate of investment made during 2007 – 2012.

Construction Equipment Industry which was valued at $1.7 billion during the year 2006, has grown with a an estimated CAGR of 18 per cent to $3.3 billion in 2010 and looking ahead there is a potential to grow six to seven times to $22.7 billion by 2022.


Future Demand Scenario:

With focus of infrastructure development such as Roads, Bridges, Tunnels, Hydro and Power Plants, Highways, Expressway, etc. there is tremendous opportunity for growth of construction equipment and machinery market in India. Significant government investments in infrastructure, particularly in roads and highways, have created avenues of growth for construction equipment and engineering procurement construction (EPC) players. Compared to Western countries, the Indian market is not saturated and there is ample room to enhance productivity through mechanization and sheer expansion.

Sunil Chaturvedi believed that leadership across political spectrum realizes the need of speedy economic revival and, therefore, the new Government will be under intense pressure to kick-start the economy. He was confident India will see significantly improving sentiments from Q3 of FY 2015. Once projects start coming back to the market, equipment industry should scale back to 2010-11 levels. He was also positive that the new government will address some of the fundamental issues of taxation, speedy regulatory approvals and reset in banking channels and set the stage for private sector investment.

As a company, TIPL was bracing for major resurgence in infrastructure and mining sectors in 2015-16 and activities building up to a level not yet seen in recent years, Sunil Chaturvedi assured.

B. Sridhar, Head, SDLG Business, Volvo India Pvt. Ltd was also expecting growth to happen after the elections. Once the new government comes in and gets formed – they will need to arrange funds and find out the infrastructure needs – it will take some time. At least one quarter will go for them to kick off any of the projects. But there will be huge growth from India’s infrastructure perspective.

Igor Palka, CEO – bC Expo India Pvt. Ltd stated that there is a very obvious need of further infrastructural development plans in view of the country’s general need to improve the current situation. The growth of the construction equipment industry is almost assured; the rate of itself will depend on streamlining different issues, such as government clearances and approvals, administrative and procedural reforms or generally on the pace of project executions.

After the decrease in units in 2013, I would positively think about a slight increase in 2014 unit numbers. As it most probable will pick up only from second half onwards I presume single-digit growth rate, Igor Palka added.

While construction equipment industry’s long term growth is assured, the near future growth may take few quarters till the new government takes office and restarts the decision making process that has been stalled in recent months. Also, the forthcoming state assembly elections in Maharashtra – a state which attracts the largest investment across India may play a slight demand spoiler in short term.

Conclusion:

Public sector investment coupled with private sectors innovation will definitely give impetus to the growth for roads, water canals and pipe networks, new industrial units, ports, airports, hydro and power projects. The next few years will definitely change the entire outlook of the construction equipment and machinery industry. In the next few months post elections, there will be vital signs of future growth in procurements. None should be too concerned about the short-term economic volatility because India remains a sure thing for the long-term.

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