ICRA revises outlook on construction equipment sector to negative on slowing economic growth

Ratings agency ICRA on Thursday revised the outlook on construction equipment (CE) sector to 'negative', citing sharp drop in unit sales amidst slowing economic growth.

ICRA said it has revised the outlook on the sector following a sharp correction in unit sales amidst slowing economic growth and infrastructure investments, both by public and private sector, and 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," ICRA said in a statement.

The sharp volume contraction would exert pressure on earnings and overall credit profile of CE OEMs (original equipment manufactures), it added.

"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 led to a contraction in fresh equipment buying since early CY2019," ICRA Vice President & Sector Head - Corporate Ratings Pavethra Ponniah said.

In 2018, the construction equipment industry registered a growth of around 30 per cent in unit terms, driven by strong growth in all components, particularly backhoes and excavators.

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

The ratings agency further said that road project awards contracted in 2018-19. Following the formation of a stable government in May 2019, awards and demand for CE was expected to revive.

Despite the increased capital outlay for roads, railways, and metro projects in the recent Union Budget, continued slowdown in project awards, payment delays to contractors, change in awarding model for road projects and the overall uncertainty in the economy has led to a sharp decline in expenditure on roads during the ongoing fiscal, it added.

"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," Ponniah said.

Accommodative public policy and an improvement in buyer confidence would be critical for the same, she added.