With the economy witnessing some green shoots, the outlook for the CE Industry remains positive in the coming months

– DIMITROV KRISHNAN

President, Indian Construction Equipment Manufacturers Association (ICEMA)

What is the outlook for the Indian Construction Equipment industry?

The Indian CE industry has witnessed a steady growth in last couple of years despite economic volatility observed due to the Covid-19 pandemic in this period. However, with the Government’s renewed focus on infrastructure development, the demand outlook for the construction equipment industry remains robust with several Government schemes and projects including the expansion of national highway network to 2 lakh km by 2025 already underway. In addition to this, the proposed river linking projects, last mile delivery of drinking water under Nal Se Jal scheme, Pradhan Mantri Awas Vikas Yojna, the railway network expansion and modernization, airports upgradation, mining and quarrying amongst others will create opportunities for all five segments of construction equipment industry to grow over the next 5 years. The outlook for the CE industry therefore remains positive. The Indian CE industry is likely to see a growth of 8-10% year on year.

Is the high cost of fuel impacting the sector? Since the economy has started seeing some green shots, how will it affect the performance of the CE sector in FY23? 

Rising fuel prices have adversely impacted the industry. With increasing fuel prices, the cost of running equipment has been going up, which dampened the construction activity in the country. This, in turn, affected the demand for equipment. The CE industry has taken initiatives to reduce dependency on fossil fuels and move towards alternative fuels. ICEMA has formed a group of subject experts who are deliberating on the possibility of using alternative fuels like bio-diesel for construction equipment vehicles and a proposal for the same has also been prepared. A Bio-diesel summit was organized by ICEMA in January this year wherein the recommendations of the group for adoption of bio-diesel in the CE industry were presented to Nitin Gadkari, Minister for Road Transport & Highways, who has been a great proponent of alternative fuel and has been encouraging the industry to switch to cleaner fuels. With the economy witnessing some green shoots, the outlook for the CE Industry remains positive in the coming months. However, high fuel cost and inflationary pressures (across commodities) act as a dampener to growth.

Does the need for rapid infrastructure creation and opportunities in creating quality infrastructure help the CE sector? Many of the sector is stuck in delays and non-payments, is the demand consistent?

‘Infrastructure creation’ is the backbone of economic growth for any nation, including India. In India, Infrastructure investment has a multiplier effect of 2.5 which clearly signifies the importance of infrastructure development for the country. The announcement of a Rs. 7.5 Lakh Crore CAPEX, up 35% YoY, is therefore a step in the right direction and a testimonial of the Government’s enhanced focus on Infrastructure creation. The National Infrastructure Pipeline offers a huge opportunity for creating world class infrastructure in the country. However, implementation of planned infrastructure projects in a timebound manner is critical for creating a sustained demand for construction equipment. Persisting high inflation in input materials like sand, cement, steel, fuel etc. led to contractors going slow on execution. Some payment delays from the State Governments have also adversely impacted sentiments. These challenges need to be addressed to ensure a sustained demand in the industry.

How is the rising raw material price impacting manufacturing in the construction equipment sector? Can India emerge as a global manufacturing hub given the ‘Make in India’ initiatives for productive manufacturing?

Growth of the Indian Construction Equipment (CE) industry has been severely impacted by rising raw material prices.  In particular, the steep increase in the price of steel has placed immense pressure on the manufacturing cost of construction equipment players. Most component suppliers of the Indian CE industry comprise MSMEs who often do not have the support to absorb an increase in raw material prices. The rise in raw material prices combined with increased cost of finance have led to increased input prices for the Indian CE industry. Apart from a direct impact, the rise in prices of bitumen, coal, cement and fuel have led to a slowdown in the implementation of road construction projects, one of the largest end-users of construction equipment. The Indian CE Industry boasts of a large presence of global CE OEMs alongside domestic players, which has led to enhanced focus on R&D and innovation in the sector. ‘State-of-the-Art’ manufacturing technologies being used by CE OEMs in India is at par with the world.

Are banks and NBFCs still cautious about lending to the CE sector?

The Construction Equipment sector, being highly capital intensive, is largely dependent on financing. Approximately 90% of Construction Equipment are purchased via external financing and availability of low-cost finance continues to remain a key challenge for the sector. Construction equipment end users, especially first-time buyers and small players (SMEs), have limited financing options and find it difficult to raise finance from traditional sources due to no or limited credit history, forcing them to raise funds at higher rates of interest. However, the Government has recently taken some positive steps towards ensuring ease of availability of low-cost finance for the infrastructure sector. Setting up of National Bank for Financing Infrastructure Development (NaBFID) is one such step taken in the direction. It is essential that NaBFID is made operational at the earliest. ICEMA has also represented to the Government to accord a ‘Priority Sector’ status to the CE Industry so as to ensure unhampered access of low-cost funds in the sector.

Do you think rentals will gain prominence in the future market given the financing and cost issues in the market?

The Construction Equipment Rental Industry in India is still in a very nascent stage and is largely unorganized. However, with many larger players now entering the equipment rental business, the construction equipment rental Industry in India is expected to witness good growth in the medium to long term. Further, India’s low equipment rental penetration, vs. global peers, also offers a huge growth opportunity for equipment rentals in the country. While Construction equipment rental penetration in India has increased from less than 10% in 2016-17 to 20-22% at present, it still lags behind the global average of 50%. Moreover, with contractors reeling under inflationary pressures and high construction costs, equipment rentals offer a good alternative to purchasing equipment. Smaller players, in particular, benefit from renting equipment considering the high cost of finance involved in purchasing new equipment. The outlook for equipment rentals in India is therefore positive, especially with more and more organized & established players entering the rentals Industry.

How are exports faring in the construction equipment sector and is there any revival expected in the overseas market?  

Indian CE exports have grown by 60% YoY in FY22, implying increased focus of the industry towards exports and greater acceptance of Indian manufactured heavy equipment in the global markets. With the Indian CE industry transitioning to the new CEV-IV emission norms for wheeled equipment, there exist significant export opportunities in advanced markets globally.

Going forward, growth in Infrastructure investment will ultimately lead to technological advancement in the CE industry in India. For example, telematics is being extensively embedded by Indian CE manufacturers, especially in Mining Equipment; Advanced Driver Assistance Systems (ADAS) are being implemented to ensure higher levels of safety in road construction as well.

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