The Indian CE sector is already seeing green shoots of revival.

The CE industry expects the recovery to be gradual amid easing of lockdown and opening up of the economy.

- Rajesh Nath, Managing Direct, VDMA

To what extent the earthmoving equipment segment has contracted due to current crisis? 

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.

The growth in the construction equipment sector is directly dependent on infrastructure development. Due to Covid-lockdown and restrictions, companies reported close to zero revenues during April and May as most projects across the country had come to a standstill. The industry was down by almost 80 per cent, making it an extremely challenging period.

Is the demand set to witness further contraction in FY21?

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 de-growth of 16% in CY2019. Volumes de-grew by 22% in FY2020. The situation has been further exacerbated by the Covid-19 outbreak and the nationwide lockdown. The industry is expected to de-grow 20% during CY2020. Dealers and original equipment manufacturers (OEMs) are saddled with significant inventory, which will negatively impact the carrying costs of the industry in H1 FY2021.

The rate of awards is far slower than the execution, leading to a moderation in the pipeline of orders. In addition, problems like land acquisition delays, cost escalation and weak contractor liquidity will continue to affect demand. 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. Many dealers have 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.

How do you assess the impact of the proposed emission norm change?

Emission norm change (on production of engines >50HP) to TREM IV standards for backhoe loaders and wheeled loaders is scheduled for October. It is expected the 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.

However, the road transport and highways ministry has proposed deferring stricter emission norms for construction equipment vehicles, in an attempt to offer relief to the agriculture and infrastructure sectors, amid covid-19 crisis.

The covid-19 crisis and a nationwide lockdown to contain had brought economic activities to a grinding halt, putting several businesses under liquidity crunch. The proposal, if implemented, will defer higher expenses related to BSVI norms for the manufacturers, dealers, while benefiting road builders and thus induce buying.

Moreover, the pandemic is a big learning opportunity for all. While planning their recovery roadmaps, the construction companies should invest efforts to increase the resilience of their business models and may focus more on the plug and play solutions like prefabricated ducts and utilities, etc. to improve the quality and speed of project execution.

How does the supply-demand scenario look like after the announcement of the stimulus packages and measures announced by the government / NHAI on the CE sector, so far?

While the current situation seems challenging, there is no denying the fact that the construction sector will play a catalytic role in the recovery of the Indian economy in the post-lockdown world. The sheer size, and the large workforce that it employs, makes it critical for the Indian economy. The government of India has announced Rs. 20 lakh crore stimulus package to revive the badly hit economy, which includes aids for the construction industry.

In a big relief for the construction workers, the state governments have been directed to utilize the welfare fund with a corpus of Rs 31,000 crore. Reserve Bank of India's decision to cut lending rates by 75 basis points; Rs. 30,000 crore liquidity infusion in the non-banking sector; 25% reduction in existing TDS and TCS rates (releasing Rs. 50,000 crores); and the government's proposed investments in the infrastructure segment are all expected to provide the necessary tailwind to facilitate the sector's recovery. The government has also instructed all central agencies like Railways, Central Public Works Department to provide an extension of the deadline, up to six months, with no costs to the contractor.  

What time frame do you expect the opening up of commercial mining to trigger the demand for excavators and wheel loaders?

One of the most vital pillars of Prime Minister Narendra Modi's Aatmanirbhar Bharat strategy is
the opening up of commercial coal mining. Forty-one coal mines are to be auctioned through transparent bidding. There are no end-use restrictions on the coal production from these mines. Coal gasification and liquefaction will be encouraged. Bidders will not require any previous experience in coal mining — they simply have to put up sufficient deposit money. Mining plan approval will be provided in 30 days, rather than 90 days.

As per Coal Ministry estimates, these 41 coal mines are likely to produce about 225 million tonnes annually. It will require Rs 33,000 crore in capital expenditure to get these mines going and, at potential coal prices of Rs 1,500 to 2,000 per tonne, they are likely to generate about Rs 34,000 to Rs 45,000 crore in annual coal revenues.

The move should boost production and mining efficiency. It is expected that the substitution of imported non-coking coal with domestic production could save roughly Rs30,000 crore of coal imports. It expects the participation of private miners to increase competition, and enhance productivity by facilitating the use of latest equipment, technology and services through higher investments.

However, mining is a fairly labour intensive activity in India given the small equipment size and is therefore heavily dependent on the availability of manpower/labourer on ground. Also, substantial number of labourers are involved in loading and transportation of ores. With mine operations being scaled back, many such migrant workforce have gone back to their native places or are just waiting for the lockdown to be over. Hence, in order to scale back the operations to normalcy, as we see surge in demand again, the availability of adequate number of qualified workers will remain a key constraint for miners.

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