ICRA Ltd., in its latest research update on the Indian mining and construction equipment industry, says that demand in the Indian MCE industry will pick up towards the end of the current fiscal (October 2015 to March 2016) and grow by six-seven per cent during the period, followed by a sharper rise of 20-25 per cent during 2016-17.
According to ICRA, 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.
In line with the expectations, MCE demand during 2014 contracted by over 15 per cent to 47,000 units from 72,100 units in 2012. While the volume decline was felt across all product segments during 2014; segments such as backhoes and heavy mobile cranes were some of the worst impacted, while wheel loaders fared better. Road compaction equipment also suffered on the sharp slowdown in implementation of road projects during the election period of the first half of 2014-15, but has since picked up moderately.
In the last one year, the Government has announced several policy measures aimed at expediting project executions and fast-tracking approvals to kick-start the investment cycle. However, the on-ground pace of movement has been impeded by a variety of factors, including sector-specific constraints, demand dynamics, tight credit and high indebtedness of participants. Effectively, private sector interest and funds flow into the hands of contractors / executing agencies continues to be constrained. Hence demand will 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 provide some immediate respite, while execution of road projects remains slow. Funding tie-up by railways is likely to drive spending in the sector over the next few quarters, while ports corporatization may impact the industry dynamics positively.
ICRA’s 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 for excavators; equipment utilisation is abysmally low at 50-60 per cent; wide disparity in demand across several States; and the return of a few large contractors in niche pockets. The financing landscape however has worsened with rising delinquencies, making equipment financing a potential constraint for the market.
As per the study, almost 70 per cent of the dealers that ICRA interacted with witnessed degrowth in sales volumes during the first four months of the current year. While they continue to be hopeful of recovery driven by the expected pick-up in project execution, the current low level of machine utilization, large fleet of onground idle inventory and the tight funding scenario remain the major dampeners. Most dealers have revised their growth expectations for 2015 downward in line with the year-to-date performance. Nevertheless, they pin their hopes on improvement in the pace of implementation post-monsoon with volume revival to follow during H2 2016.
In ICRA’s view, several of the measures such as fast tracking of clearance processes, relaxing investment norms, awarding projects on EPC basis, and increasing outlays for infrastructure projects are all well-intended. However, a lot depends on the sense of urgency with which these would be implemented over the next few quarters.
Nevertheless ICRA reiterates its strong long-term positive outlook for the Indian MCE industry driven by potential demand for infrastructure development in the country.