Allocation of Rs. 1 lakh crores for rural roads and infrastructure development should help create sustained demand for the mining and CE industry.
Mayank Agrawal Sector Head and Assistant Vice President, Corporate Sector Ratings, ICRA As the government aspires to grow Indian economy to $5 trillion by 2025, how do you look at the Union Budget 2022 – 23 unlocking opportunities for
– Mayank Agrawal
Sector Head and Assistant Vice President, Corporate Sector Ratings, ICRA
As the government aspires to grow Indian economy to $5 trillion by 2025, how do you look at the Union Budget 2022 – 23 unlocking opportunities for India’s CE industry?
The Union Budget 2022-2023 tries to address core issues faced by the construction sector and augurs well for the investment in the infrastructure sector, which in-turn will push demand for the mining & construction equipment industry. The budget has factored in a significant increase in capital expenditure in FY2023 to Rs. 7.5 trillion, which is 24.4 % higher than Rs. 6.0 trillion in FY22 RE. Over 60 % of the capex is towards three key sectors – defence, railways, and roads. The overall capex including grants and aids for creation of capital assets is budgeted to increase by 27% from Rs. 8.4 trillion in FY22 RE to
Rs. 10.7 trillion in FY23 BE, which is estimated at 4.1% of GDP. Further, allocation of Rs. 1 lakh crores to states for rural roads and infrastructure development should help create sustained demand for the mining and construction equipment industry.
How do you think this budget will help in pushing investments in the infrastructure, construction and mining space especially after a stagnant period of the Covid-19 pandemic?
The capital expenditure in key infrastructure segments like railways has been budgeted to increase to Rs. 2.45 trillion in FY23 BE (increased by 14% over FY22 BE), Roads and Highways to Rs. 2.08 trillion (marginally higher by 4.8% over FY22 BE), while that of metro and MRTS projects has been stagnant at Rs. 191 billion. Drinking water supply has also seen growth in allocation under the Jal Jeevan Mission with allocation increased to Rs. 60,000 crore in FY23 BE (from Rs. 45,000 in FY22 BE). Additional allocation to the PM Awas Yojna will also favour the overall growth of construction industry and in turn the CE industry.
Further, the state government plays a critical role in the National Infrastructure Pipeline (NIP), with 40% of overall Rs. 111 trillion expected to be invested by the states. With decline in revenues, many state governments had resorted to lower-than required infrastructure spending over the last two years. In this context, the proposal in the Union Budget 2022-23 to provide assistance as loan to states for capital expenditure and increasing the allocation to Rs. 1.0 trillion in FY2023 BE from Rs. 150 billion in FY2022 RE is a welcome development. This is expected to provide more head room to state governments for increasing the capex. Overall, higher capex by centre, and support towards states could help in improving the pace of infrastructure investment and remain a positive for creating a sustained demand for the mining & construction equipment industry, which has witnessed slow pace in the current fiscal.
The finance Minister, in her budget speech, has stated that National highways in India will be expanded by 25,000 km during 2022-23. What is the impact of this on the CE sector in terms of skilled employment as well as from business generation?
In the road sector, while capital outlay by Government has been increased in 2022-23, no incremental debt by NHAI is factored. Hence, including the IEBR (market borrowings) and asset monetisation proceeds for the NHAI, the total capital outlay has increased marginally by 4.8% to Rs. 2.08 trillion in FY2023 BE as against Rs. 1.98 trillion in FY2022 BE but is 1.7% lower than FY2022 RE of Rs. 2.11 trillion. The government’s impetus on road is expected to push road construction activity in FY2023, which is likely to support demand for construction equipment industry, especially towards earthmoving and road equipment such as crawler excavators, motor grader, wheel loaders, road roller, asphalt mixers and pavers.
What do you think are the present challenges and the road ahead for CE industry?
The CE industry is facing challenges in terms of increased price of equipments, following multifold increase in commodity and freight, rupee depreciation (given high import content) and change in emission norms (CEV IV). While the cost of CE ownership has increased, the equipment rentals continue to remain under pressure due to unorganised or fragmented nature of the market. This has not only impacted demand, but has also curtailed ability of OEM’s to fully pass on prices, thereby adversely impacting profitability of OEM’s and CE operators. Consequently, there is an increasing need for OEM’s to move towards higher indigenization and expand local manufacturing capabilities. This will not only result in industry being more resilient to external shocks, but also result in leaner working capital cycle, as OEMs have to maintain 3 months of imported components due to higher lead time.
Further, the financing ecosystem is also evolving with presence of several NBFCs as well as banks, planning to grow their construction equipment loan book. However, access to financing for first time buyers (FTBs) and small contractors remains constrained (with LTV remaining in range of 70-80% as compared to 80-90% for regular buyers) and provide scope for improvement.
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