Domestic CE industry is expected to register 7-10% annual volume growth during CY2022.
Mayank Agrawal Sector Head and Assistant Vice President, Corporate Sector Ratings, ICRA What is ICRA’s growth outlook on the construction equipment (CE) sector? The second wave of Covid along with an increase in equipment prices (following changes in emission
– Mayank Agrawal
Sector Head and Assistant Vice President, Corporate Sector Ratings, ICRA
What is ICRA’s growth outlook on the construction equipment (CE) sector?
The second wave of Covid along with an increase in equipment prices (following changes in emission norms and steep rise in input costs) coupled with muted rentals and erratic monsoons slowed down the volume growth post Q1 CY2021 and thus, the volumes for H2 CY2021 are estimated to remain weaker than H2 CY2020. While this trend is expected to continue for Q1 CY2022, ICRA believes that with easing of supply side constrains and continued infrastructure push, domestic CE industry is expected to register 7-10% annual volume growth during CY2022 (CY2021 to witness 15-17% growth) & 10-12% in CY2023. However, any slowdown in infrastructure activity, or any subsequent pandemic wave poses downside risks to our estimates.
What do you think are the demand drivers for CE sector in India?
The performance of the CE industry remains linked to the GDP growth and economic activity. ICRA estimates the real GDP to grow by 9.0% in FY2022, mainly supported by vaccination ramp-up and demand in contact-intensive sectors along with government’s continuous push for infrastructure development in the country.
Government thrust on Infrastructure sector continues to be the key growth driver for the industry. During FY2022, there has been a significant ramp-up in the capital outlay budgeted by central and state governments. Further, for CY2020-25 period, as per Department of Economic Affairs, Govt of India, the total infrastructure sector capex under national investment pipeline (NIP) is projected at around Rs 111 lakh crore, with around 71% of the projected infrastructure investments in India into key sectors such as energy (24%), roads (18%), urban (17%) and railways (12%). Out of the total NIP investment outlay of Rs 111 lakh crore, Rs 44 lakh crore (40%) worth of projects are already under implementation, Rs 34 lakh crore (30%) worth of projects at the conceptualisation stage, and Rs 22 lakh crore (20%) worth of projects are under development.
What are the challenges you foresee for the CE segment and what can be done to iron out these challenges?
Majority of the domestic CE OEMs depend on higher proportion of imports. The global supply chain disruptions during the pandemic necessitate OEMs to move towards higher indigenisation and expand local manufacturing capabilities. This will not only make the industry more resilient from external shocks but will also lead to an improvement in local manufacturing ecosystem along with the improved bottom line over the long run.
Financing ecosystem is also evolving gradually with presence of several NBFCs as well as banks aggressively 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 the range of 70-80% as compared to 80-90% for regular buyers) and provides scope for improvement.
The rentals and the pre-owned CE markets remain highly fragmented in India. As the CE demand remains cyclical, there is an urge for capital conservatism, especially during the uncertain or volatile periods. Consequently, demand shift from outright purchase to rental model during cyclical downturn and therefore a developed rental market with presence of larger players will help in stabilising the rental yields.
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