Construction equipment demand to falter further following COVID-19
01 Jun 2020
The Indian construction equipment industry is facing numerous headwinds as a result of the economic slowdown and other factors impacting construction activity. As a result, it witnessed a significant volume degrowth of ~16 per cent in CY2019; volumes de-grew by ~22-24 per cent in FY2020. The situation has been further exacerbated by the COVID-19 outbreak and the nationwide lockdown. The industry is expected to de-grow by 15-20 per cent during CY2020. These were the conclusions of ICRA’s nationwide survey of construction equipment dealers across 12 states in the country, covering Andhra Pradesh, Bihar, Jammu and Kashmir, Punjab, Haryana, Himachal Pradesh, Uttarakhand, Telangana, Karnataka, Kerala, Madhya Pradesh and Rajasthan conducted through April 2020.
Offering more insight, Pavethra Ponniah, Vice President and Sector Head, ICRA, says, “Apart from the impact of the lockdown during March to May 2020, COVID-19 has crippled several industries and eroded livelihoods. Weakness in government revenue streams, more so at the states; redirected government support to healthcare, possibly at the cost of all other capital spends; the need for structural changes incorporating social distancing in several industries like construction; movement of labour and material; and the cost of restarting the economy – all these thwart the ability to make forecasts for sectors intrinsically linked to the underlying economy. Unforeseen headwinds will be many in coming months.”
Here are some of the findings from ICRA’s survey:
- During FY2020, 43 per cent of the respondents witnessed volume degrowth >25 per cent. Dealers in a few states like Karnataka and Bihar reported volume growth between -5 and 5 per cent.
- A tough financing environment and liquidity strain in the market made it difficult for a majority of the dealers to secure funding, thereby impacting sales to some extent during FY2020.
- The majority of respondents indicated that fund flow from the government was weak. While payment from the Central Government was flowing, payments from state governments were stuck, which in turn impacted construction equipment demand.
- As for rental demand, 50 per cent of the respondents said it was in line with previous years while ~30 per cent felt otherwise, which impacted fresh equipment buying to a certain extent.
- Sales during March 2020 were severely impacted by the COVID-19 outbreak and the ensuing lockdown; ~83 per cent of respondents witnessed volume degrowth of over 60 per cent (in some cases as much as 80-90 per cent).
- Typically, March of every fiscal is the best month during which construction equipment sales witness a surge in volumes but not in FY2020, leading to relatively higher inventory holding.
- Currently, 85 per cent of respondents hold more than one month of inventory, which is adding to higher interest costs for Q1FY2021.
- Despite tight conditions, dealers received timely funds from financiers for sales during February and March 2020, even while the lockdown impacted sales during March 2020.
- 71 per cent of respondents expect demand to revive during Q3 FY2021 after Q2 FY2021, which is typically a lean period for the industry on account of monsoons.
- The extent of volume degrowth during FY2021 remains uncertain given current market conditions; 50 per cent of respondents expect volumes to decline by 15-25 per cent while 29 per cent expect volumes to remain flattish during FY2021.
- Emission norms change (on production of engines >50HP) to TREM IV standards for backhoe loaders and wheeled loaders is scheduled for October 2020. More than 70 per cent of respondents expect the changes to be implemented as scheduled.
- More than 85 per cent of respondents expect cost of equipment to increase by 5-10 per cent given the upfront investments incurred by OEMs to implement emission norm changes in wheeled loaders and backhoe loaders.
As for the outlook going forward, Ponniah adds, “The COVID-19 pandemic has led to significant global retrenchment in economic activity during the current year. Demand will remain dependent on the pandemic being contained, trend in fund flow from the government, pace of project awards and availability of transportation (for raw materials)
and labour at project sites.”
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