The construction equipment industry is expected to witness 20% degrowth in calendar year (CY) 2020. A recent survey revealed that dealers and original equipment manufacturers (OEMs) are saddled with significant inventory, which will negatively impact the carrying costs of the industry in H1 FY2021, said an Icra note on Monday. Demand revival is likely only in the third quarter of FY2021, the credit rating agency said.
The Indian construction industry is facing numerous headwinds as a result of the economic slowdown and other factors impacting construction activities. As a result, the construction equipment (CE) industry witnessed a significant volume degrowth of 16% in CY2019. Volumes degrew by 22% in FY2020. The situation has been further exacerbated by the Covid-19 outbreak and the nationwide lockdown. The industry is expected to degrow 20% during CY2020. These were the conclusions of Icra’s survey of CE dealers across 12 states in the country — Andhra Pradesh, Bihar, J&K, Punjab, Haryana, Himachal Pradesh, Uttarakhand, Telangana, Karnataka, Kerala, Madhya Pradesh and Rajasthan. The extensive survey was conducted throughout April.
According to Icra’s findings, in FY2020, 43% of the respondents witnessed volume degrowth > 25%. Dealers in few states like Karnataka and Bihar reported volume growth between 5 and 5%. Tough financing environment and liquidity strain in the market made it difficult for majority of the dealers to secure funding, thereby impacting sales to some extent during FY2020.
Majority of the respondents indicated that funds flow from the government was weak. While central government payment was flowing, payments from state governments were stuck, which, in turn, impacted CE demand. As for rental demand, 50% of the respondents said it was in line with previous years while 30% felt otherwise, which impacted fresh CE buying to a certain extent.
Sales during March was severely impacted by the Covid-19 outbreak and the ensuing lockdown as 83% of the respondents witnessed volume degrowth of more than 60% (in some cases as much as 80-90%). Typically, March of every fiscal is the best month during which the CE sales witnesses a surge in volumes. But this was not the case in FY2020, which lead to relatively higher inventory holding.
Currently, 85% of the respondents hold more than one month of inventory, thereby adding to higher interest costs for Q1FY2021. Despite tight conditions, dealers received timely funds from financiers for sales during February and March, even while the lockdown impacted sales in March.
Nearly 71% of the respondents expect demand to revive during Q3 FY2021, after Q2 FY2021, which is typically a lean period for the industry on account of monsoons. The extent of volume degrowth during FY2021 remains uncertain given current market conditions; 50% respondents expect volumes to decline by 15-25% while 29% expect volumes to remain flattish.
Emission norm change (on production of engines >50HP) to TREM IV standards for backhoe loaders and wheeled loaders is scheduled for October. More than 70% respondents expect the emission norm changes to be implemented as scheduled. More than 85% respondents expect cost of the equipment to increase by 5-10% given the upfront investments incurred by OEMs to implement emission norm changes in wheeled loaders and backhoe loaders.
Pavethra Ponniah, VP and sector head, Icra, said, “Apart from the impact of the lockdown during March to May, Covid-19 has crippled several industries and eroded livelihoods. Weakness in government revenues streams, more so at the states; redirected government support to healthcare, possibly at the cost of all other capital spends; the need for structural changes incorporating social distancing in several industries like construction; movement of labour and material; and the cost of restarting the economy — all these thwart the ability to make forecasts for sectors intrinsically linked to the underlying economy. Unforeseen headwinds will be many in the coming months.”