In line with expectations, Mining and Construction Equipment (MCE) demand during 2014 contracted by over 15% to 46-47,000 units from 72,100 three years back in 2012. While the volume decline was felt across all product segments during CY2014; segments such as backhoes and heavy mobile cranes were some of the worst impacted while wheel loaders fared a tad better. Road compaction equipment also suffered on the sharp slowdown in implementation of road projects during the election period in H1, 2014-15, but has since picked up moderately.
Despite various reforms related to the infrastructure segment, the MCE industry did not witness traction in demand during the first half of CY2015 also. Projects being stalled/shelved and abandoned continued to plague the market-due to sector specific issues, product viability issues and in some cases due to promoter cash flow constraints.
ICRA Research believes that demand in the Indian MCE industry will pick up towards the end of the current fiscal (October 2015 to March 2016), with demand for MCE expected to grow by 6-7% during 2015-16, followed by a sharper pickup of 20-25% during 2016-17. 2016 promises to be a better year for most of the product segments as a result of the ongoing policy measures leading to absorption of surplus inventory in the market. Scale up in demand for MCE is often non-linear, with assured job orders and cash flows triggering strong buying, as construction activity picks-up momentum.
"Our extensive interaction with the industry threw up a few interesting demand blips for the past six months; absolute demand for backhoes suffered significantly more than the demand for excavators; equipment utilisation is abysmally low at 50-60%; wide disparity in demand across several States; and the return of few large contractors in niche pockets. Financing landscape however has worsened with delinquencies expected to climb further during January-September ’15, making equipment financing a potential constraint for the market."
In the last one year, the GoI has announced several policy measures aimed at improving ease of doing business, clearing hurdles for expediting project executions and fast-tracking approvals to kick-start the investment cycle. However, the on-ground pace of movement continues to remain slow impeded by variety of factors including sector specific constraints, demand dynamics, tight credit availability and high indebtedness of participants. Effectively, private sector interest and funds flow into the hands of contractors / executing agencies has been constrained.
In view of the near term pain points; ICRA expects demand to remain suppressed for another couple of quarters before project execution gathers momentum driven by initiation of works under contracts awarded over the last 12 months. Developments in the coal mining sector provides some immediate respite, while execution in road projects remain slow. "We believe funding tie up by railways is likely to drive spending in the sector over the next few quarters, while ports corporatization is expected to impact the industry dynamics positively."
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