India's huge spending on infrastructure development is not just driven by the need to meet the infrastructure deficit, but also to reignite the pace of economic growth. The government's intense focus on developing world-class infrastructure, backed by its ability to facilitate quick implementation of projects, financing and simplification of procedures for project awards and clearances are factors that are going to drive infrastructure in the years ahead.
The infrastructure construction equipment (ICE) industry had a bull run from 2014 to 2018 where the industry volumes grew by almost 120 per cent, in comparison with 2014. This growth was fuelled by resurgence in buying, driven by the legacy clean-up of stalled government orders, particularly in the roads sector. The public-private partnership (PPP) renegotiations and adoption of hybrid annuity model (HAM) which saw many stalled orders being revived led to a spurt in purchase. Interestingly, the industry always followed a dip in the fifth year after a constant rise, which in this period came about in the CY 2019 after a constant increase from CY 2014. The last dip seen was in CY 2012 where the industry fell by 13 per cent and in the current year, the dip is by about 15 per cent. This dip is usually followed by a continuing decline for the next two years. The bright side would be that the earlier decline was largely with issues which were structural in nature, which has now been fixed to a large extent. The current dip could be associated largely to cash flows, which the government is working on fixing the same. The current overall volumes for CY 2019 stood at ~94,100 units which translate into Rs 350 billion (Rs 35,000 crore). This is a negative growth of 15 per cent from the volume of 110,000 units in CY 2018.
The equipment industry continued to be driven largely by sectors like roads and railways. Other sectors like real estate and mining are yet to recover. The current decline in the industry was largely attributed to multiple factors like delay in project kick-start, slow execution rates, delayed payments by the National Highways Authority of India (NHAI), rising interest costs, liquidity crunch and the general elections of 2019.
Government's continued support on infrastructure spending, even during the 2020 Budget is the need of the hour. The National Infrastructure Pipeline (NIP) created by the government is definitely going to bring a focussed push for the sector. With the government's vision to achieve a GDP of $5 trillion by 2024-25, India needs to be spending $1.4 trillion on infrastructure over the next five years. The NIP has been set up seeing this challenge to step up the annual infrastructure spend.
Other key measures announced during the Budget 2020 include:
- Measures to increase liquidity in the system, aiding bank lending to NBFCs
- Approval of Rs 250 billion (Rs 25,000 crore) bailout fund for at least 1,600 stalled projects
- Amendments in the Toll Operate Transfer (TOT) model to make it more attractive for private investors
Key segments driving demand
For the next two-three years, roads and highways would be the main growth drivers of construction equipment followed by railway and irrigation projects. Simultaneously, the coal sector is expected to see greater demand for equipment as Coal India has mentioned an investment of close to Rs 33 billion (Rs 3,300 crore) on heavy machinery.
With the government's announcement of creating additional 100 new airports under the UDAN scheme, the airports sector is expected to drive some demand for equipment in the coming years, which otherwise was limited to expansions in key airports. The real estate sector has shown some growth over the past one year and has an inventory of over four lakh unsold units across the top 10 cities. This will take over two years to clear, but the silver lining is the commercial sector where demand for office space by the IT/ITeS and service industry continues unabated.
From a segment-wise share, earthmoving equipment accounted for more than 68 per cent of the overall volume, which was largely led by backhoe loaders and hydraulic excavators.
The earthmoving equipment segment accounts to 68 per cent by volume, which in turn sets the tone for the overall equipment market. In CY 2019, this segment saw a decline of 14 per cent. With the sensitivity of the Indian construction, mining and allied equipment industry to the demand for backhoe loaders and hydraulic excavators, their negative growth acts as a bellwether to the entire industry. Yet, the backhoe loaders alone contributed to 43 per cent of the overall sales by volume during CY 2019, a very India-specific phenomenon. Backhoe loader continues to be the equipment of choice as the market shifts from manual labour to mechanisation.
Hydraulic excavator is usually considered as an upgrade to backhoe loaders by most customers. Even though the hydraulic excavator market has grown by 75 per cent compared to 2015, last year this market dipped by 15 per cent compared to 2018.
The segmental share of equipment with earthmoving category for CY 2019 can be summarised as below:
Approximately 45 per cent of sales were from all type of roads. This also includes the sale to quarries which largely supply to road projects,
While 15 per cent sales were from irrigation and railways,
Less than 18 per cent sales were from general construction and real estate projects, and
The rest from other segments like rural infra, mining etc.
The other key segment which contributes to 11 per cent of the overall sales, concrete equipment also showed a decline of 12 per cent compared to the CY 2018. This decline was again largely due to lower demand from segments like Railways, concrete roads and irrigation projects. The real estate sector which was in limbo over the last few years saw some green shoots with a 23 per cent growth in launches over the last year. The sales to real estate rose from overall 15 per cent to 28 per cent in the current year. This is encouraging considering that how the industry was 4-5 years back, where real estate accounted for more than 50 per cent of the total concrete equipment industry. Transit mixers, concrete pumps and self-loading concrete mixers (SLCMs) are the most preferred equipment rented by contractors and institutional segment. During CY 2019, 25-30 per cent of the transit mixer sales and ~15 per cent of the SLCM sales were towards the rental segment. Sales volume of transit mixers to institutional segment was increased by 8-10 per cent.
There was a considerable dip in the road equipment segment compared to CY 2018. The sales fell by overall 18 per cent. This dip is in conjunction with the other equipment in earthmoving and concrete which also get used in the road segment.
The road equipment was largely impacted by various issues faced by the government, especially by NHAI. The rise in debt of NHAI grown 7.5 times since 2013 and the increased land acquisition cost by 235 per cent since 2013 are some of the factors which impacted the segment.
On the brighter side, over the past 1-2 years, state highways have started using the equipment similar to the ones used in national highways - the traffic density of roads has increased manifold, forcing most state highways to be upgraded to four-lane or sometimes even converting them to national highway status.
Further, large private players have started to participate in state highway projects, bringing in new technology which earlier was restricted to national highways alone. The volume of state highway roads have prompted these players to participate in the same, which earlier was ignored. Another primary reason is that most state highway projects are still awarded on EPC mode, thereby reducing their risk, compared to BOT.
Road construction historically has had a high penetration of rented equipment like backhoe loaders, hydraulic excavators and compactors. In the immediate future as well, it appears that large contractors and developers propose to hire capital-intensive equipment like crushers, motor graders, crawler dozers and pavers, instead of purchasing them outright.
Material handling equipment
The negative sentiments were also shared by the material handling equipment (MHE) industry, which saw a decline in sales by 20 per cent. The MHE industry is dominated by the pick-and-carry equipment which accounts to more than 90 per cent of the overall sales of the segment. Other equipment like tower cranes, crawler cranes and truck-mounted cranes such as all-terrain, rough-terrain and truck cranes account for the rest of the segment.
Real estate, urban development projects, power, railways, ports and industrial segments account for close to 90 per cent of the MHE sales.
Other segments where MHE is sold include mining, irrigation, quarry and road segment.
Power sector is the largest user of all other cranes - tower cranes, truck cranes, crawler cranes, all-terrain cranes and rough-terrain cranes. Metro rail projects across the country also use high-capacity cranes like rough-terrain and truck cranes. The rental market in the MHE segment is very strong. More than 85 per cent of the sales in MHE are towards the rental segment. There is a good opportunity for heavy capacity cranes like all-terrain cranes, rough-terrain cranes and truck cranes in the rental segment, providing job contract services for oil & gas, refinery, power and metro rail segments.
Impediments for growth
The government, in the last five years, has done many structural changes across segments to ensure that the infrastructure development can be carried out at full pace. These structural changes did bring about some fillip in the project announcements and execution. But, now the challenge has moved more towards a liquidity crunch, rising largely from the IL&FS crisis and tightening of finance availability for NBFCs. NHAI has also seen a rise in its debt and land acquisition costs. Some of the key impediments for the equipment industry to realise its potential would be:
- Real estate and mining segments are still lagging behind. The government should ensure that they provide some boost to these segments for it to come back to the growth cycle
- Reviving PPP in infrastructure projects: In the short run, the government might be able to infuse funds to kick start projects. But in the long run, this move might not be sustainable.
- Availability of funds for contractors to take up projects
NIP: A key growth driver
The government's plan to invest Rs 102 trillion over the next five years will definitely give some fillip to the equipment industry. Roads followed by urban transport and railways have the highest allocation in the same. The government has already front loaded the programme with close to 34 per cent of the projects under implementation. This gives enough time, over a year, to kick-start the 27 per cent under development to be announced and bring the others to æunder development'.
Strategies for increased equipment use
There could be disruptions in the industry, both from a product and service perspective. Some likely developments include:
Growth in pre-fabricated concrete business: This could lead to reduced use of concrete equipment like transit mixers, concrete pumps and boom placers. Concrete equipment like batching plants could see a spurt in sales.
Increased use of specialised equipment: There could be a movement towards more specialised equipment, which might impact the business of backhoe loaders in small way, specifically, competition from excavators under 14T and wheel loaders of under 3T payload capacity.
Rising manual labour costs: In spite of considerable mechanisation across key infrastructure segments, real estate, rural roads etc, the need for manual labour will continue to be considerable. Projects will face inflationary pressures due to rising labour costs. The stagnant or low volume sales of products like skid-steer loaders could see increased demand due to the rising manual labour costs.
Digital drive: Higher penetration of e-commerce is increasing the acceptance among customers. This in turn is slowly penetrating into construction industry also. There are e-commerce portals providing men and material for construction industry. As per Feedback analysis, an exclusive equipment financing institution which caters to the need of the entire ecosystem could very well emerge.
As can be seen from the above, there is scope for a few innovative disruptions; it would be interesting to see what would set these in motion.
Even though the government has shown intent in keeping up the pace in infrastructure projects through NIP, the current liquidity crunch could derail its plan on keeping up the momentum. There are many plans on the anvil to monetise road projects by NHAI like Infrastructure Investment Trust (InvIT), which is expected to provide NHAI with Rs 60 billion (Rs 6,000 crore). On the other hand, the real estate market is seeing some green shoots with launches witnessing a 23 per cent raise over the last year. There also has been a downward correction in prices across most markets. The banking sector has, most probably, seen the worst NPAs in recent times and things could only look better going forward. Easing of liquidity seems to be the key bottleneck which the government needs to tackle to put the infrastructure segment back on to the growth path. A slew of measures announced during Budget 2020-21 is encouraging and in the right direction.
The above measures will help the equipment industry to regain its momentum to put things back on perspective. Historically, the equipment industry has been growing at a 7 per cent growth rate, considering a 15 year data cycle. This growth is expected to continue even though there would be some short-term ups and downs in the market volumes. The industry is expected to touch close to 140,000 volumes by 2024-25. With the right push from the government, this industry also has the potential to touch the above numbers two years in advance!
Mahesh Madhavan is the Head-Construction & Infrastructure, Feedback Consulting.