ICRA expects construction equipment demand to decline by about 20%.

Increased spending by the GoI on infrastructure could trigger CE demand.

-Ms Pavethra Ponniah, VP & Sector Head - Corporate Sector Ratings ICRA Limited

Could you enlighten us on the impact of the current crisis on the overall CE Industry?

After three strong years when industry volumes hit an all-time high in CY2018, CY2019 saw the industry fall by 16%(on a FY basis, it contracted by ~23% in FY23). Plagued by tight liquidity conditions in the market, delayed payment to contractors and an overall slowdown in Government spend on infrastructure activity, industry volumes contracted sharply during CY2019. Industry volumes had started to recover from December '19 with Government clearance of payments and increased spending. The lockdown from March '20, however, pulled down this growth momentum. In Q1CY2020 the industry reported a 20-25 % volume decline. In March 20 volumes fell by ~50% followed by a sharp 80-90% fall in April volumes. Demand continued to be muted in May 20 also.  June however witnessed an increase in demand - particularly for backhoes supported by some pent-up demand and pick up in rural activity.

Is the demand set to witness further contraction in FY21? What are the major challenges the CE industry is facing in today's context?

While underlying structural problems on land acquisitions and construction models continue, the Covid-19 pandemic has created severe headwinds to demand. ICRA  expects construction equipment demand to decline by about 20%. There is considerable downside risk to this forecast. Given the limited fiscal space available with the government in the current environment, depth of the decline is contingent on directed government stimulus towards infrastructure.

State-led capex accounts for over half of the total Government driven capex in the country. Given the short fall in Gross State Domestic Product (GSDP), the GoI recently enhanced the permitted net borrowing of the State Governments in FY2021 to 5% of GSDP from 3% of GSDP, to address the expected shortfall in their revenues related to the pandemic. Of this permitted enhancement, only part is unconditional borrowing and is estimated by ICRA at Rs. 1.0 trillion, which pales in comparison to the gap between the estimated GST compensation requirement and the funding for the same through cess collections. This shortfall will lead to a sharp contraction in capex at state levels. This in turn will have a negative impact on equipment demand.

What sort of course correction is needed to scale up the infrastructure investment that can trigger fresh equipment buying?

Liquidity transmission from lenders to the construction industry, fast tracking of payments and release of retention money to contractors, and arbitrations awards are few ways to push for faster execution of projects apart from increased spending by the GoI on infrastructure. These could trigger fresh buying. Demand for CE is intrinsically linked to the economic activity in the country.

What time frame do you expect the opening up of commercial mining to trigger the demand? 

Coal output from commercial mining will take 3-4 years; hence buying activity from this is some time off.

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