Ratings agency, ICRA has revised the outlook on the construction equipment (CE) sector to ‘stable’ from ‘negative’, following strong ramp up in volumes. Heightened focus on infrastructure spend, particularly in the road infrastructure segment has led to a sharp scale up in volumes since July 2020 (20%+ Y-o-Y growth during July-Jan’21 period).  The various   underlying factors supporting healthy revival in industry volumes over the last few months are sharp increase in the  awarding and execution pace of road construction; increased focus on rural infrastructure; strong rural volume off-take for equipment on the back of second consecutive good monsoon; improving demand from railway and mining segments and the regular payment flow from the government to contractors.  Demand has also been supported by steady inflows from the Central government on infrastructure spend, particularly on roads, even though state infrastructure expenditure has been severely curtailed and diverted to the pandemic management.

Says Pavethra Ponniah, Vice President & Sector Head, ICRA, “Following a  sharp correction in unit sales in Q1 FY2021,  CE OEM volumes have recovered sharply since, supporting industry credit profile. Raw material price hikes, particularly for steel, has however had an impact on profit margins. OEMs have and are expected to take further price hikes to pass on these cost pressures. ”

Two critical demand headwinds in the coming quarters are: the continued limited fiscal bandwidth with State governments to invest in infrastructure and the price hikes following the upcoming emission norm change in April 2022 (sale of vehicles post April 2022 and production post October 2021 to be in accordance with new norms TREM IV).

“State governments are key contributors to the infrastructure activity in the country. Modest growth in SGST collections, delays in receipt of GST compensation, and the reduction in the central tax devolution to the states in FY2020 below the level budgeted by the GoI, have complicated the liquidity management of the State governments. This could potentially derail the equipment industry, as it slows down infrastructure investment,”  added Pavethra.