CY2021 likely to witness a healthy 20+% volume growth
The domestic mining & construction equipment (MCE) industry has staged a smart recovery since late June 2020, posting a YoY growth of 20-22% in Q3 CY2020. Though growth is still lower by 14% compared to Q3 CY2018 levels, it is significant considering the deep demand contraction of ~40% in H1 CY2020. As per ICRA’s update, demand for the all-purpose backhoes recovered much faster than demand for other equipment like excavators. Supporting factors like 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 strong rural demand (for agriculture and housing) aided recovery. The rating agency in May ’20 had estimated a sharp 15-20% decline in industry volumes during CY2020 but considering the demand revival since July ’20 and the continued market momentum in November ’20, substantiated by dealer check-ins, the decline now is estimated (revised) to be lower – at 12-14%. And, it expects the next year, CY2021 to witness a healthy 20+% volume growth.
Ms. Pavethra Ponniah, Vice President and Sector Head, ICRA said: “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 ’20. However, the sustainability of volumes remains a function of underlying economic activity and Government finances. Besides, the 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% of the total country’s outlay. This is a significant demand driver.”
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 rating agency forecast of a GDP contraction of 11% in FY2021, it remains to be seen whether the industry’s Q3 CY2020 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% to the country’s infrastructure spend annually. Of this, about 23-24% of the CAPEX is on roads and irrigation. The pandemic has significantly slowed down the state’s tax revenues as well as spending and despite raised borrowing limits, ICRA expects the states to face a sizeable revenue shortfall in FY2021. To bridge this the states will have to resort to severe cuts in CAPEX spend. Healthcare spends and other social requirements during FY2021 and FY2022 would take priority.
Construction activity in rural areas, including expenditure on irrigation and housing, has been a key demand driver for CE since the pandemic. Government programs (including direct benefit transfers and MNREGA), healthy agricultural cash flows, stable Government supported crop prices, healthy monsoons & high reservoir levels, favorable Kharif crop outlook; and adequate labor availability – all of which has led to a recovery in the rural economy, even as urban demand continues to languish.
The CE AUM of NBFCs declined in FY2021 (they have contracted during the past five quarters), due to a fall in demand and increased competitive pressures from banks. On the positive side, the pick-up in equipment utilization rates has abated asset quality pressures to an extent in Q2 FY2021. While most dealers opted for the first moratorium, with the pick-up in demand in Q2 FY2021, dealers did not opt for the second moratorium.
Despite the volume uptick since late June/July 20, 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 is not ruled out.
Ms. Ponniah adds: “Although the MCE industry’s medium-term demand outlook remains favorable, 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 minuscule, 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.”
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