COVID-19: Construction equipment demand to falter further
Construction equipment industry witnessed a significant volume degrowth of ~16 per cent in CY2019 and is expected to de-grow by 15-20 per cent in CY2020.

COVID-19: Construction equipment demand to falter further

  • Construction equipment industry witnessed a significant volume degrowth of ~16 per cent in CY2019 and is expected to de-grow by 15-20 per cent in CY2020.
  • Survey indicates that dealers and OEMs are saddled with significant inventory which will negatively impact the carrying costs of the industry in H1 FY2021, demand revival likely only in Q3 FY2021.
  • The Indian construction equipment (CE) industry is facing numerous headwinds as a result of the economic slowdown and other factors impacting the construction activity. As a result, the construction equipment industry witnessed a significant volume de-growth of ~16 per cent in CY2019; volumes de-grew by ~22-24 per cent in FY2020. The situation has been further exacerbated due to 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. The extensive survey was conducted through the month of April 2020.

    Also read: Construction equipment: 40% increase in sales in December 2019 

    Giving more insights on the industry scenario, 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 revenues 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 the coming months.”

    As per ICRA’s findings of the dealers’ survey,

  • During FY2020, 43% of the respondents witnessed volume de-growth > 25 per cent. Dealers in few states like Karnataka and Bihar reported volume growth between -5 to 5 per cent.
  • Tough financing environment and liquidity strain in the market made it difficult for majority of the dealers to secure funding, thereby impacting sales to some extent during FY2020.
  • Majority of the respondents indicated that funds flow from the government was weak. While central government payment was flowing, payments from state government was 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 Construction equipment buying to a certain extent.
  • Sales during March 2020 was severely impacted by the COVID-19 outbreak and the ensuing lockdown, ~83 per cent of the respondents witnessed volume de-growth of more than 60 per cent (in some cases as much as 80-90 per cent).
  • Typically, March of every fiscal is the best month during which the construction equipment sales witnesses a surge in volumes, but not in FY2020, leading to relatively higher inventory holding.
  • Currently, 85 per cent of the 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 the 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 de-growth during FY2021 remains uncertain given current market conditions; 50 per cent respondents expect volumes to decline by 15-25 per cent while 29 per cent expect volumes to remain flattish during FY2021.
  • Emission norm 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 respondents expect the emission norm changes to be implemented as scheduled.
  • More than 85 per cent respondents expect cost of the 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, adds Ponniah, “Belying hopes of a recovery in construction equipment demand supported by stepped up infrastructure spend, 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 funds flow from the government, pace of project awards and availability of transportation (for raw materials) and labour at project sites.”

    Related Stories

    Hi There!

    Now get regular updates from CW Magazine on WhatsApp!

    Click on link below, message us with a simple hi, and SAVE our number

    You will have subscribed to our Construction News on Whatsapp! Enjoy

    +91 86575 81178