The domestic mining & construction equipment (MCE) industry has staged a strong recovery since late June 2020, posting a year-on-year growth of 20-22 per cent in Q3 of CY20.
Though growth is still lower than Q3CY2018 levels by 14 per cent, it is significant considering the deep demand contraction of 40 per cent in H1CY20, Icra said in its report today.
As per Icra’s update, demand for the all-purpose backhoes recovered much faster than that for other equipment like excavators. Supporting factors such as strong project awards in the road sector, timely release of payments to contractors for all Central Government projects and a few state projects (in North India); and a strong rural demand (for agriculture and housing) aided recovery.
The ratings agency had, this May, estimated a sharp 15-20 per cent decline in industry volumes during CY20 but considering the demand revival since July and the continued market momentum in November, substantiated by dealer check-ins, the decline now is estimated (revised) to be lower at 12-14 per cent. Moreover, the agency expects the next year, CY21, to witness a healthy plus 20 per cent volume growth.
“The MCE industry’s recovery in H2 CY2020 is steeper than expected. Our channel check with dealers has indicated that strong footfalls and conversions continue in November. However, sustainability of volumes remains a function of underlying economic activity and Government finances. Besides, resurgence in Covid-induced urban lockdowns and the prolonged economic weakness running into four quarters will also play their part. Weak state finances have impacted state capex which accounted for 40 percent of the total country’s outlay. This is a significant demand driver,” the report quoted Pavethra Ponniah, vice president and sector head at Icra as saying.
The key MCE demand drivers in the current market are Central Government projects, particularly roads and rural demand.
Healthy awards and execution rates of road projects by the NHAI has boosted volumes of backhoes and excavators, more recently.
Pick-up in regular funds flow from the Central Government continues to support volumes. However, new state projects have not taken off as most states are struggling with fiscal bandwidth.
On the other hand, healthy volumes in the agri-segment besides heightened activity under the PMAY and the PMGSY are the primary cause for rural demand.
In view of the ratings agency forecast of a GDP contraction of 11 per cent in FY2021, it remains to be seen whether the industry’s Q3CY20 demand revival continues or abates. This, given the fact that the overall infrastructure activity is still negative due to weakness in infrastructure and real estate activity. This subdued trend is worrying, given the crucial role of capital expenditure in reviving economic activity.
State governments contribute 37-45 percent to the country’s infrastructure spend annually. Of this, about 23-24 percent of the capex is on roads and irrigation.
The pandemic has significantly slowed down state’s tax revenues as well as spending and despite raised borrowing limits, ICRA expects the states to face a sizeable revenue shortfall in FY21.
To bridge this, the states will have to resort to severe cuts in capex spend.
Healthcare spend and other social requirements during FY21 and FY22 would take priority.
Construction activity in rural areas, including expenditure on irrigation and housing has been a key demand driver for construction equipment since the pandemic.
Government programs (including direct benefit transfers and MNREGA), healthy agricultural cash flows, stable Government supported crop prices, healthy monsoons and high reservoir levels, favorable kharif crop outlook; and adequate labour availability – all of which has led to recovery in the rural economy, even as urban demand continues to languish.
On the positive side, the pick-up in equipment utilisation rates has abated asset quality pressures to an extent in Q2 FY21.
Despite the volume uptick since late June-July, Icra has maintained a negative outlook on the sector as demand sustainability is uncertain. A prolonged economic slowdown triggered by the pandemic, the Government’s limited fiscal bandwidth for investments and the risk of Covid resurgence leading to further lockdowns and construction disruptions are not ruled out.
“Although the MCE industry’s medium-term demand outlook remains favourable, given the need for continuing investments in infrastructure investments, demand for CE is typically highly cyclical in nature - experiencing deep troughs and sharp peaks. The ability of the players to successfully navigate through these cycles is critical. Though the Indian industry’s contribution to global volumes is miniscule, it has attracted global majors, given its strong potential, and thereby heightened competition. The MCE market is highly price-sensitive and, therefore, the ability to identify and launch India-relevant products at competitive prices is critical for MCE industry growth in India,” Ponniah was quoted as saying.