Budget Proposals to Trigger Construction Equipment Demand in 2020

Budgetary allocations of Rs 1.72 lakh crore for transport sector including highways, railways and waterways, along with tax holiday for Sovereign Wealth Funds will lead to faster recovery in sentiments. Experts believe the road ahead is bright and a turnaround will happen in Q2FY21.

As the government aspires to grow Indian economy to $5 trillion by 2025, the Construction Equipment (CE) industry thought that Budget 2020 will unlock opportunities for India’s CE industry. The industry as a whole sought initiatives to increase spending on infrastructure and astute policies for the automotive sector. Although the budget is found to be wanting it has tried to great extent to trigger demand by proposing large scale investments in the transport, manufacturing and infrastructure space.[/vc_column_text] The CE segment over the last decade became one of the most volatile segments of the automotive industry, as it got the tag of one of the fastest growing sectors on the back of investments in the infrastructure, construction and mining space. However, after a terrific 2018, the CE Industry witnessed a demand compression in 2019 led by constraints in liquidity and fresh investments. Volumes dropped in key product categories, including backhoe loaders, excavators and wheeled loaders, amid slowdown in road projects.            

The CE industry also faced financing issues due to delayed payments for ongoing infra projects, crisis in the NBFC sector. The industry expected the upcoming budget to include provisions for reviving demand growth by creating funding opportunities, energising the PPP (Public Private Partnership) model and re-looking at asset re-monetisation. The Union Budget 2020 presented by Finance Minister Nirmala Sitharaman on February 1 although could not touch upon all the points as desired, it proposed Rs 1.75 lakh crore for the development of transport infrastructure including the railways, raods and waterways. An exclusive emphasis on Highways through accelerated highways development programme will be a big boost to the construction equipment industry both from skilled employment as well as from business generation point of view. This will also give a big boost to economic growth, which has slipped over six-year low of 4.5% in July-September quarter of 2019.[/vc_column_text] Samir Kanabar, Tax Partner, Ernst & Young, said, “Allowing tax exemption to Sovereign Wealth Funds for Infrastructure sector will attract more investments and new sovereign wealth funds which should help achieve large scale ambitious push to the sector and thereby fuel growth in the economy. Also, development of cities and railways will boost confidence towards organised and sustainable business model which will attract private and foreign investment. Commitment towards infusing equity of Rs 22,000 crores into IIFCL & subsidiary of NIIF will help create long term debt funding towards Capital Expenditure for creating new infrastructure. Fresh investment in capex for infrastructure sector will not only create new employment and leave more disposal income in hands of common man but create a pipeline to repay the capital or debt. Financial reform in infrastructure sector and making investment by Sovereign Wealth Funds tax free will create a larger platform for Infrastructure Business Trusts.” He added that developing infrastructure is key for the growth of any economy and the recent announcement of Rs 100 lakh crore investment in infrastructure over the next five years is a welcome move as it comes at a time when the Industry has built capacity and capability over the years, and parts of which have remained underutilised in the immediate past.     [/vc_column_text] Subir Kumar Chowdhury, MD and CEO, JCB India said the Union Budget 2020-21 should keep the momentum going and create funding opportunities. He lauded Modi government for taking steps to revive demand growth, including announcements in infrastructure spends and a reduction in corporate tax rates. Adding to it, the Reserve Bank of India (RBI) has supported through improved liquidity and lowering of interest rates. 

“Infrastructure will continue to be a key growth driver in the investment lead growth philosophy. The construction equipment industry is critical in fulfilling the $5 trillion economy dream of India and as an industry we are hopeful that the Budget helps un-lock the opportunities that the sector has to offer.”     

It is also expected that after the recent developments in Asia, and some of the electronic goods manufacturers already having established base in India, India is at advantage position to attract foreign investment for electronic manufacturing. Government could have announced more sops for electronic goods manufacturing to take advantage of current situation in Asian manufacturing hubs so as to attract exponential investments. Electronic goods manufacturing will not only create employment opportunities but also boost foreign exchange reserves by saving spend on import of electronic goods but also through export earnings.[/vc_column_text] Ranganath N. K, Area Managing Director, INDO Region, Grundfos, said, the Budget has addressed the challenges of severe water stress in the nation as one of its top most agenda., This budget gets to the bottom of things by proposing comprehensive measures for 100 water-stressed areas. Given that the budget also aims to empower famers by increasing their dependence on off-grid solutions with solarised grid-connected pumps through the PM Kusum Scheme, I think that this will act as a catalyst to sustainable irrigation solutions across the country. This abundant allocation in agriculture is likely to positively rural development.” He also added, “We are greatly excited to see the budget allocation for Jal Jeevan Mission. Also the foreseen investment in the renewable energy sector will enable the government to achieve its national action plan on climate change.”[/vc_column_text] The Road Ahead for CE industry:

Sales of construction equipment seem to have bottomed out after a 25% drop in the first half of the fiscal, thanks to a revival in government projects, especially in the southern states. The industry reported marginally improved sales over preceding months in September, October and November although none of these months recorded growth year on year. Construction equipment include machines used for earthmoving, road building, handling concrete, material handling, and material processing, among other special equipment. Apart from a revival in government infrastructure projects, an improvement in financing from non-banking financial companies (NBFCs) is pushing sales, said Ravi Chawla, managing director at Gulf Oil Lubricants.   

NBFCs had tightened their lending in the aftermath of the IL&FS crisis last year, drying up funds for potential buyers, thus sending the manufacturing and housing sectors into a tizzy. “Most of the impetus will come through road construction and government infrastructure projects,” said Chawla who is also a spokesperson for construction equipment expo Excon. Several of these are coming up in Karnataka. However, there is no revival in demand from the real estate sector since the market is saturated with unsold inventory and very few new projects are coming up. Demand has especially increased in states bound for elections in the coming two years. “Some of the states which are heading towards election are putting a lot of money into developmental projects. In some of the product categories, Tamil Nadu has done even better than last year. The industry expects to close the fiscal year with a 15-20% decline in sales, as per data from Indian Construction Equipment Manufacturers’ Association and Confederation of Indian Industry (CII). The industry will widely miss its earlier estimate of $5 billion in revenue, closing the year with revenue of less than $4billion. This, after four consecutive years of growth and gross sales of 97,835 units in FY19. “Major demand drivers going ahead will be roads sector, irrigation, railways, ports, mining,”a CII report said.[/vc_column_text] Anil Bhatia, VP Sales & Marketing, Material Handling Solutions, at TIL, believes, “We are headed for good times as far as construction and material handling industry is concerned. The words of Nitin Gadkari were very encouraging at the Excon event in Bengaluru. If you see his track record in the last five years, whatever he has committed, he has delivered. I think if he has said, we should be poised for a 40% growth we are really excited.”           

Ratings agency ICRA believes, the new order inflows for construction companies will improve in 2020 with a huge pipeline of projects in the infrastructure sector. It however noted, that delays in land acquisition, funding issues, and state government priorities pose a serious threat to new order inflows. The ratings agency expects the new order inflows for construction companies to improve in Calender year 2020. As the government plans to more than double the investment in infrastructure sector to about Rs 100 lakh crore over the next five years, the construction companies are likely to witness significant opportunities with key segments being highways, railways, ports, urban infrastructure and airport.[/vc_column_text] In the railways segment, besides the core railway capex, doubling, new lines, signaling and electrification and the station redevelopment expected to provide significant opportunities to the construction companies. Similarly, in the highways sector, adequate pipeline of projects for development and upgradation of national highways and state highways exists. The Bharatmala Pariyojana itself is expected to provide large opportunities for the construction sector as the programme is the largest road development programme in India.        

However, delays in land acquisition, funding issues, and state government priorities remain key risks to the new order inflows. The order inflows from non-infrastructure segments like industrial and real estate (excluding affordable housing segment) are expected to remain muted, with weak private sector capex growth. “The order inflow for construction sector has been robust over the last few years, supported largely by increased government spending towards infrastructure.

“However, H1-FY2020, has witnessed lower new order inflows and cancellations of some orders in Andhra Pradesh, which has resulted in a decline in order book for some players. Nevertheless, the order-book position of most of the construction players is currently adequate to provide medium term revenue visibility,” Icra said.        

On the execution front, Icra expects the healthy order-book should support growth in operating income of construction companies in the first half of 2020, though it could witness moderation if the new order inflows weaken. But, construction companies which have leveraged balance sheets and stalled or slow-moving projects, would continue to face challenges.               

As for financial health, operating profitability is expected to remain stable with the benefits of benign inflation and steady execution though this would also be dependent on any steep variation in key raw-material and labour cost. However, the capex and working capital requirement could absorb most of the cash accruals.[/vc_column_text][/vc_column][/vc_row]

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