New Delhi: After forging ahead with strong double digit growth in the past two years, the construction equipment (CE) sector is in for a hard landing in financial year 2019-2020.
The financial issues that has happened because of credit crunch in non-banking financial companies (NBFC) coupled with slowdown in road construction programme and delay in awarding new infrastructure projects by the government dented the sales volumes of construction equipment by over 25 per cent in the first half of FY’20, as per the industry experts.
“Our industry began to see early signs of negative growth from the last quarter of FY’19 which further intensified in the second quarter of FY’20. There was a slowdown in infra project execution and awarding in the first three months because of elections, that unfortunately continued even after the election and led to volume drop by about 25 per cent in key product categories,” Sorab Agarwal, MD, Action Construction Equipment Ltd (ACE) told ETAuto.
On the financing front, Agarwal mentioned big project companies suffered funding crunch during the period under review which delayed the execution of project thereby resulting in muted demand of equipment.
According to a CARE Ratings report, during FY’19, 5,493 km length of National Highways were awarded, which was 67.8 per cent lower than 17,055 km of national highways awarded during previous year FY’19. Furthermore, projects award target has been reduced to 6,000 km for FY’20 from 20,000 km for FY2018-19.
The subdued funding climate and ongoing economic slowdown led to a drastic drop in awarding of new road projects, which are a key demand driver for CE sector, pointed out Pavethra Ponniah, Vice President and Sector Head – Corporate Sector Ratings.
“Cumulative sales of the key product categories have seen a decline in the range of 25-28 per cent in the first half of the current fiscal,” Ponniah said.
Underlining the dependence of industry on shadow banks, Arvind K Garg, Executive Vice-President and Head, Construction & Mining Machinery Business, L&T said NBFCs and private banks are an important enabler for the CE industry as more than 90 per cent of the equipment sold in India are funded by them.
“Review or cancellation of contracts by some newly elected state governments as well as a slower execution pace during the monsoon period added to the negative sentiments. H1 FY’20 therefore, has been subdued across various CE segments,” added Garg.
Besides, Garg also mentioned that higher receivables due to delay in the release of payments by various government agencies as reported by some infra companies, is also causing stress in cash flow management at the customers’ end, exacerbating the situation.
Throughout 2018 the domestic CE industry registered a growth of about 30 per cent in unit terms, driven by strong growth in all components, particularly backhoes and excavators. This followed over two years of strong growth since CY2016-17.
However, after the downfall of shadow lending group IL&FS, the CE industry has started facing liquidity challenges as credit flow from small financial institutes contracted sharply.
While the CE players are sanguine about the sentiment revival with the 68 new project announcement by MoRTH, the situation on the financing front presents a bleak outlook.
Due to continued demand compressions for nine straight months, the CE space has begun reflecting early-stages of delinquencies in the CE portfolio for NBFCs underlined Ponniah.
“We are looking at about nine months of weak demand and less working hours so delinquency is bound to increase for this sector which will make lending to CE space tighter over the next few quarters at least,” said Ponniah.