Slowdown in infrastructure and real estate projects hits equipment demand

Sales affected after 3 yrs of growth in volumes

A slowdown in infrastructure and real estate projects has weighed on demand for construction equipment. After three years of consecutive growth in volumes, sales of such equipment including excavators and backhoe loaders, have been affected since the crisis at IL&FS (infrastructure and leasing Financial Services) broke. 

It is expected to end this calendar year with a decline of 15-18 per cent, the sharpest in many years.  

The slowdown has prompted the manufacturers of construction equipment to shut plants and recalibrate their plans. They expect the impact of the recent measures announced by the government to re-boot the economy and infrastructure to show in the next three to six months. 

Take the case of Tata Hitachi. The company that makes road excavators for mining and infrastructure sectors was forced to shut its plants Dharwad, Karnataka and Kharagpur in West Bengal — 24 days in the last four months, said Sandeep Singh, managing director, Tata Hitachi.

“Our plants which till last year were operating at 75-80 per cent capacity utilization are now running at half the capacity,” said Singh. As a result, Tata Hitachi has deferred 30 per cent planned expenditure for the current financial year. Most of it, he added, is related to volume expansion. Singh, who is also president of the Construction Equipment Manufacturers Association, expects the industry to end the calendar year with a decline of 15-18 per cent over the last year. 

Subir Kumar Chowdhury, managing director and chief executive of JCB India, has similar views. 

The disruption of the payment cycle, which is causing liquidity challenges and stress for NBFCs, has impacted the industry, he said.

“At JCB we are equally affected with these developments, and are now re-calibrating our business to adjust to the lower demand,” he said. Chowdhury is hopeful that the announcement of large-scale infrastructure projects together with a strong focus on rural development should help in demand revival.

To be sure, roads have been the primary growth engine for CE demand in the past three years since calendar year 2016. Therefore, a contraction in road project awards in the current year has impacted demand for CEs adversely. The expected contraction in the current year comes on back of last three years of growth — 30 per cent in calendar year 2018. However, growth started contracting in early part of 2019 in the run-up to the general elections. Till September, industry volumes have contracted by over 20 per cent. 

CARE Ratings expects the overall pace of road construction to slow down to about 26-27 km per day during FY2019-20 (refers to period April to March) owing to slow down in pace of awards, limited budgetary support, high risk aversion of public sector banks to infrastructure projects, worsened liquidity position of NBFCs and disruption in construction activity during monsoon and high cost of land acquisition. 

ICRA has revised the outlook on the Construction Equipment (CE) sector to Negative.  Demand headwinds are likely to continue in the near-term unless there is a course correction by the public sector.

But not everyone is complaining. Ajay Mandahr, CEO of Escorts Construction Equipment, pointed out that the September quarter is generally the weakest for CE Industry due to monsoon. A better planning network expansion, new product launches, proactive field approach, etc has helped Escorts gain market share in this quarter.

He, however, conceded that elections, liquidity crisis, heavy and extended monsoons in major markets, delayed payment, have impacted the industry adversely.

“Growth in construction equipment in the previous years was fuel by government investments. We expect the government to take the lead and front end the infrastructure investments. India still has infra deficit and would need $1-1.5 trillion in the next four-five years to overcome this,” he said. 

The weakness in demand for such CE however, has so far not translated into lower rentals for construction companies, said MS Unnikrishnan, managing director and chief executive officer, Thermax.

“There is an anticipation that the demand slowdown for such equipment will bring down rentals, but that has not happened so far. It may happen going forward.” He added the weakness in demand has improved availability of certain specialty cranes which was not the case earlier.  Others agreed. 

“We can plan for just in time and getting equipment for shorter duration which was not happening before," said Vimal Kejriwal, managing director and chief executive officer for KEC International said pointing out that there is a “marginal impact” on rentals, but availability and lead time reduced.