ICRA revises outlook on construction equipment sector to negative

Following a sharp correction in unit sales amid slowing economic growth and infrastructure investments, ICRA has revised the outlook on construction equipment sector to negative.

Demand headwinds are likely to continue in the near-term unless there is a course correction by the public sector which leads to sizable scale up in infrastructure investments directly and through enabling policy measures thereby triggering fresh equipment buying, it said on Thursday.

The sharp volume contraction will exert pressure on earnings and overall credit profile of construction equipment original equipment manufacturers.

"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 have led to a contraction in fresh equipment buying since early calendar year 2019," said Pavethra Ponniah, Vice President and Sector Head for Corporate Ratings at ICRA.

During 2018, the construction equipment industry registered a growth of 30 per cent in unit terms, driven by strong growth in all components, particularly backhoes and excavators. This followed over two years of strong growth since 2016.

However, growth started contracting in early 2019 in the run-up to the general elections. Till August, industry volumes have contracted by 16 per cent in the key product category of backhoe, excavators and wheeled loaders.

A majority of construction equipment original equipment manufacturers in India are joint ventures or subsidiaries of global majors. Companies import critical engine, hydraulic and track components, partly from the parent or the parent's global supply chain. Volatility in the rupee and long lead time for inventory has added to the cost woes of the industry.

"The outlook on the sector could turn stable if demand environment improves on a consistent basis, with revival in public and private sector expenditure on infrastructure projects. Accommodative public policy and an improvement in buyer confidence will be critical for the same," said Ponniah.

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