Impacted by the extended nationwide lockdown, the construction equipment industry, which was already going through a slowdown due to headwinds on several fronts before COVID-19 outbreak, is likely to witness a 15-20 per cent decline in revenues in 2020, rating agency Icra said.
According to a survey conducted in April with construction equipment dealers from 12 states such as Andhra Pradesh, Bihar, Jammu & Kashmir, Punjab, among others, the volumes are also expected to witness a 15-20 decline during the calendar year 2020, the rating agency said.
“While construction activity on projects under execution was on, new project awarding activity was muted in the 12 months pre-Covid also. In particular, weak road project awards in the past few quarters severely reduced equipment demand prospects, as the single biggest driver for construction equipment demand in the past three years has been the roads sector,” Icra Vice President and Sector Head Pavethra Ponniah said.
Currently, the rate of awards is far slower than execution, leading to moderation in pipeline. In addition, problems like land acquisition delays, cost escalations and weak contractor liquidity affected demand.
“Factors like weakened state government finances, diversion of government support to healthcare at the cost of all other capital spends; new structural changes incorporating social distancing in several industries like construction; movement of labour; and the cost of restarting the economy – all these make the construction equipment industry forecast rather uncertain,” she added.
Moreover, unforeseen headwinds in coming months cannot be ruled out, Ponniah said.
Consequently, Icra has scaled down its 5-10 per cent growth estimate for the year 2020 to a decline of 15-20 per cent.
According to Icra, the construction equipment industry contracted 16 per cent year-on-year in 2019, after three strong years of growth, as the domestic economy and construction industry witnessed a slowdown coupled with challenges like tight liquidity conditions, delayed payment to contractors and falling government spend on infrastructure.
The agency further noted that though industry credit profile is likely to moderate, debt metrics will stay adequately comfortable despite decline in revenues.
“With the strong cash accrual build-up over the past few years, dependence on external debt by the industry has been limited. This trend is expected to continue despite the decline in accruals during FY2020 and FY2021,” it said.
Further, the lockdown and disruption in utilisation will affect cash flows of equipment users, leading to weakening of borrower profile, it said.
Icra expects around 200 bps increase in delinquencies in the coming quarters, which will curtail lender appetite.