On a Shaky Wicket

[vc_row][vc_column][vc_column_text]The global slow down seen in the economy is casting a shadow even over the excavators and motor grades. However, consistent uptake in large infrastructure projects will pull the segment back on track

Excavators have recently become a familiar scene in urban and rural areas of India alike. One of the widely used construction equipment, the manufacturers have realigned the size and features to cater to the market demands. The Construction Equipment segment had a taken a hit in the past few years with a dip in order owing to several factors, for example, the first half of the current year had taken a hit due to the elections. The market remained subdued during April 2019 to September 2019.             

With significant announcements for both infrastructure, rural road development and real-estate segments through the budget presentation, the stakeholders expected an uptick in the second half of the current year.           

However, the not so encouraging global news about an impending economic slow down has cast a shadow. For construction equipment segment, particularly for excavators, roads have been the primary growth driver.  Despite the increased capital outlay for roads, railways, and metro projects continued slowdown in project awards, payment delays to contractors, change in the awarding model for road projects and the overall uncertainty in the economy has led to a sharp decline in expenditure on roads during FY2020.[/vc_column_text][vc_column_text]Considering the importance of having a buoyant infrastructure and construction segment, essential to hold economy afloat, the government has announced booster packages. Real Estate, a segment that was marred with liquidity crunch, saw a healthy allocation of Rs 20000 crore to address the last mile issues.   

The announcement was followed by corporate tax cuts within a short span and also the central bank RBI revising interest rate downwards, straight for the fifth time, all are seen as eventually fuelling the growth momentum.  

On the other hand, research reports and organisations predict an upscale for the global excavators market.  One of the recently published reports says, “The global excavators market is expected to grow in future due to increasing urbanisation, rising construction expenditure, an improving economy. Key trends of this market include high demand in the fuel-efficient excavator, rapid technological advancements, use of IoT in construction, increasing demand from the rental market and rising adoption for other applications. However, there are some factors which can hinder the market growth, including stringent emission norms and high maintenance of hydraulic excavators.”        

The industry daily observer report says, “The global Excavator market is valued at US$ 29500 million in 2018 is expected to reach  US$ 35000 million by the end of 2025, growing at a CAGR of 2.2 per cent during 2019-2025.”           [/vc_column_text][vc_column_text]Construction Equipment sector outlook revised to 'Negative.'

In a recent development, ICRA, the rating agency has revised its outlook on the Construction Equipment segment to negative. According to ICRA, this is following a sharp correction in unit sales amidst slowing economic growth and infrastructure investments, both by the public and private sector; and a tight liquidity environment.      

Demand headwinds are likely to continue in the near-term unless there is a course correction by the public sector, which leads to sizeable scale-up in infrastructure investments directly and through enabling policy measures thereby triggering fresh equipment buying. The sharp volume contraction would exert pressure on earnings, and the overall credit profile of CEOEMs continued the report. 

Pavethra Ponniah, Vice President & Sector Head - Corporate Ratings, ICRA, explains “Slow movement in award of road projects during the past several quarters, delays in payment to contractors, continued land acquisition issues and overall tightness in the financing environment has lead to a contraction in fresh equipment buying since early CY2019.”               [/vc_column_text][vc_column_text]The industry also reflects the negative sentiments. Hemant Mathur - Assistant Vice President,  Sales and Marketing, Tata Hitachi points out “the Construction Equipment demand is down by around 25 per cent this year and the excavator market is in line with this trend. However, some segments within excavators are performing better than the overall trend, Mini excavators, 35T & mining excavators are faring better as these are driven by slightly different demand drivers a) Mini excavator demand is driven by urbanisation & increased mechanisation. b) 35T is mainly used in mining quarries. c) Mining excavators are driven by investments in coal overburden removal, etc.”              

However, Jasmeet Singh, Vice President, Corporate Communication, JCB India had a different perspective. He said, “The announcement and execution of large-scale infra projects such as Sagarmala and Bharatmala along with a continued focus on building rural infrastructure have energised the market for excavators. We feel this momentum will continue as the infrastructural development is an ongoing process, and the progress of the nation too is dependent on this.      

The recently announced thrust on building new airports with a focused approach on the current opportunities in Power and importantly, rural infrastructure will give the much-required boost to the sector.    [/vc_column_text][vc_column_text]Road Ahead

Realigning the products to cater to the demands of the market, efficiency improvement, widening the sales and support network to new geographical areas, integration of AI and IoT in the machines, etc., can make an OEM sustain in this market conditions. It is also observed that the negative ratings can also turn into a stable one if the demand environment consistently makes headway.[/vc_column_text][/vc_column][/vc_row]

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