Demand for construction equipment on road to recovery

Government efforts to speed up building of roads and highways are not only helping the sector but also benefiting the construction equipment industry that saw a 37% increase in demand after going through a slump during the last three to four years.

With a slew of measures taken by the Ministry of Road Highways and Transport (MoRTH) to revive stressed projects and even to execute new road projects, the market is upbeat and is expecting better days that will follow.

During the first quarter of this fiscal, the rate of highway construction was 22 kilometre per day. The number of stalled projects came down from 384 in FY2014 to 19 by the end of the last financial year. There are plans to resolve all the remaining projects by December 2016.

As the infrastructure projects are facing financial crunch due to an unfavourable investment climate, policy-related measures have been taken to ease the climate so that more liquidity is available to the developers.

Instead of Built-Operate-Transfer (BOT) basis, the projects are now being tendered either through Engineering-Procurement-Construction (EPC) or Hybrid Annuity Models (HAM), under which the private players do not have to operate the assets or bear all the risk alone.

"Now there are only 2-3 companies bidding for BOT projects, one of which is us, as compared to 15-16 that were there earlier," said Sudhir Hoshing, joint managing director of IRB Infrastructure Developers. IRB is one of the few infrastructure companies which have BOT projects and are doing well.

MoRTH has set an ambitious target to award 25,000 km in the current fiscal; out of this 15,000 km is through National Highway Authority of India (NHAI) and 10,000 km through National Highways & Infrastructure Development Corporation Limited (NHIDCL).

"The rate of execution of road construction has risen significantly in the recent past on account of speedy clearances and availability of clear work front to the developers. The target set is of constructing 41 km of national highways every day in 2016-17, up from 16.6 km per day of highways built in 2015-16. Although the rate of construction experienced a dip in 2013-14 and 2014-15 as against a robust daily average of 15.7 km in 2012-13, the sector has shown notable improvement in the financial year 2016," read YES Bank's report titled 'Redefining Indian Infrastructure'.

A similar view was aired by Raghav Chandra, chairman of NHAI, "There's 35% increase in consumption of construction equipment. So has there been an increase for bitumen by 35%, but cement and steel demand has increased by only 5%. Construction equipment is relatively in short supply as the order books of these road equipment manufacturers are full."

This year alone, NHAI intends to award projects worth Rs 1 lakh crore.

However, construction equipment industry players are of a different view when it comes to order books being full and overflowing.

"Last three years had witnessed a decline in construction equipment industry, but this year rural and road sectors have witnessed development and there is an increase in demand. Road infrastructure sector is certainly picking up. There is up to 20% increase in demand upon last year. But it still has not reached the peak levels that were seen during the year 2010-11," shared Igor Palka, chief executive officer of Bauma Conexpo India, a construction equipment exhibition to be held in December at New Delhi.

But this sign of revival is only limited to road sector and not as much in the other sectors of real estate, power, airports, etc.

Investment in infrastructure, utilities, ports, roads and highways are the main growth drivers for construction equipment industry. The trend is already evident as Indian construction equipment market has been on a strong recovery track after an ebb of four years and is slated to increase by 50% to around 75,000 units by 2019.

Sachin Nijhawan, vice president & business head, Mahindra Construction Equipment, Mahindra & Mahindra Ltd said, "We would capitalise on this growth by introducing innovative products which offer enhanced value proposition. Backhoe Loaders would continue to remain the pivot of this growth of Indian construction equipment sector. The EarthMaster range of BHL from Mahindra, which has registered year-on-year robust growth of over 44%, would continue to maintain this momentum in coming years."

"Strong domestic demand, generated by on-going infrastructure development projects, resulted in the construction equipment market rising by 45% in 2010 and a further 22% to an all-time high of 72,197 units in 2011. With no major initiatives by the government to speed up infrastructure development, the construction equipment market declined 8% in 2012, 16% in 2013 and 14% in 2014 to a low of 47,889 units. However, the declining trend was reversed and the market grew by 2% to 48,883 units in 2015," shared Samir Bansal, General Manager (India), Off-Highway Research, an international agency into research and analysis of construction and agricultural equipment markets.

During the first half of 2016, the estimated sales of construction equipment increased by 37% to 32,350 units. However, Off-Highway Research's report suggests that such a high growth may not be sustainable and will probably moderate in the second half of this year. The forecast is that the market will grow by 20% to 58,465 units in 2016.

The increase in demand is primarily driven by road sector with crawler excavators, motor graders and mobile compressors rising by over 20%. Sales of compaction equipment and backhoe loaders are expected to grow by over 15%, while mobile cranes, skid-steer loaders, asphalt finishers and wheeled loaders will also rise by over 10%. However, the market for crawler dozers and rigid dump trucks is expected to decline in 2016 mainly on account of low power off-take by distribution companies leading to a build-up of coal stockpiles.

"The growth (for the road construction equipment) will moderate to 9% in 2017 and further to 7% in 2018 with sales of 68,495 units. Due to the general elections scheduled in 2019, demand is expected to grow marginally to 69,445 units, but is predicted to grow 6% to 73,595 units in 2020," added Bansal.