The Juggernaut to Rumble On

The Juggernaut to Rumble On

Demand for construction equipment in the country would continue to roll on, encouraged by Government’s massive spending Basistha investigates the scenario with inputs from S. A. Faridi.

The demand for construction equipment in India would continue to remain buoyant for a considerable period. Key aspects that primarily cater to the demand would be sustained growth in infrastructure, aided by sustained large public spending initiatives. Furthermore, extensive and ongoing mechanization process of the country’s construction industry would also lead to the demand pull for equipment. The demand of equipment would be composite in its character. As per this, there would be requirement for loaders, excavators, concrete and asphalt batching plants, motorgraders, compactors, pavers, crushers, dumpers, aircompressors, liquid asphalt sprayers, road marking machines, road kerbing machines, surveying equipments, concrete conveying/ transporting equipment, vibration and compacting and finishing systems, and so on.

The Juggernaut to Rumble On

In accordance with the construction equipment industry and per NBM&CW’s own conservative estimates, the demand for equipment would continue to grow at a rate of 15 to 20 percent per annum. This is expected to continue from the year 2006 down the line till 2010 and somewhat further. Although, the demand may pass through certain phases of correction in stages but overall it would continue to remain firm and stable.

Further, as per the industry and NBM&CW’s estimates, the demand may be slow down from the unprecedented 33 percent growth which it clocked in the year 2004 but the projected figure of 15 to 20 percent is quite firm by itself and by no means modest.

Infrastructure Areas to Cater Demand

The Juggernaut to Rumble On
Precisely, future demand for construction equipment would be aided through development of power projects, which the Government plans to add in due course to meet the country’s large scale projected power requirements. Country’s power requirement has been pegged at 41,110 megawatt during the Tenth Plan period and that of 60,000 megawatt during the Eleventh Plan period. Power projects that cater equipment demand would constitute both thermal and hydro power

Besides, construction of newer airports in the country to cater the growing passenger traffic and cargo movement would lead to demand of construction equipment in large proportions as well.

As known that, apart from revamping the metro airports of Delhi and Mumbai, the Airport Authority of India has drawn an ambitious plan for modernising 35 selected nonmetro airports in the country to world class standards in a phased manner with the focus on air side and city side development. The financing issues regarding non-metro airport projects are being presently examined by the Planning Commission.

Apart from developing 35 non-metro airports, the Government is also embarking on a massive drive to modernise existing airports and build new ones at a cost of $10 billion over the next four years. The projects involve both upgrading and building airports in 41 cities, including six key cities.

Development of other key infrastructure areas would also create demand of equipment. A prime area in this regard would be the country’s port sector. The Government has recently announced the country’s ambitious National Maritime Development Programme (NMDP). The programme aims at focussed and accelerated investment for developing the infrastructure of the country’s major ports over a period upto 2011–12.

The Juggernaut to Rumble On
The total investment envisaged under the programme in the port sector is Rs. 55,804 crores. The project would be implemented through public private partnership (PPP) in two phases. The NMDP programme, essentially aims at undertaking development of berths, container terminals, roads, and railway connectivity to the ports.The Government plans to implement the NMDP programme in view of achieving the country’s ambitious target of $150 billion of exports by the year 2008–09.The NMDP is in the process of receiving Cabinet approval.

Development of special economic zones (SEZ’s) by the Government would also cater to the demand of construction equipment.The Union government has recently cleared Rs. 100,000 crore investment in SEZ’s. The SEZ’s would be spread over 40,000 hectares of land in different states.

Other infrastructure growth areas to cater demand of equipment, would be aided by through development of mass rapid transport systems (MRTS). Many states in the country are drawing up plans for developing mass rapid transport systems (MRTS) while some are in the process of expanding the same. Among this, includes the expansion of Delhi Metro Rail Corporation. DMRC plans to expand its route network before the Commonwealth Games of 2010. Besides, Kolkata Metro also plans to expand its route length.

The Juggernaut to Rumble On
Equipment manufacturers perceive, demand of products would also be led by development of real estate and rural road connectivity. But more essentially, manufacturers are of this perception that the present thrust of developing public infrastructure viz. roads, bridges, flyovers, underpasses, bypasses both in metro cities and non metro cities would catalyse equipment requirement. In this context, it would be noticeable to observe that the states of West Bengal, Chattisgarh, and Orissa have drawn up their perspective plans, spanning over the years for development of public and industrial infrastructure.

Road Projects to be Prime Demand Driver

Equipment demand apart being driven by the development in port, railways, power, and airport infrastructure projects, manufacturers see larger prospects of their products being driven by development of road projects in the country. This is pointed out by Mr. Rajesh Sharma, Marketing Head, Escorts Construction Equipment Limited. He says, “a port, airport or a power project would not be selfsustainable unless it is connected by a proper road network. This is a fact that the government has understood well leading to development of an elaborate road network in the country. This would augur well for the construction industry and the equipment manufacturers as a whole. ”Similar views are expressed by Mr. Manoj Garg, Managing Director, Dynapac Compaction & Paving Equipment (India) Pvt. Ltd.

The Juggernaut to Rumble On
True to the reasoning, government has drawn up an elaborate National Highway Development Programme (NHDP) for better port connectivity and linking of the North-South and East- West Corridors. Although large part of phase –1 and phase –2 of the NHDP programme are nearing completion. Equipment manufacturers are ebullient on development of NHDP phase 3, 4,5, 6, and 7 by NHAI. The concerned phases, envisages to improve and widen the condition of National Highways from four to six lanes. Construction of ring roads around major metropolises bypasses,flyovers, and service roads. These phases of NHDP are under various stages of approval while for some contracts has already been awarded.

Manufacturers are strongly banking their hopes on the development of roads in the North-Eastern part of the country. The development of roads in the region is government’s major priority. A scheme called Special Accelerated Road Development programme for the region (SARDP-NE) has also been considered. The programme includes, widening and improvement of 7,639 km of national highways and other roads in the states at a cost of Rs.12,123 crore. This covers a length of 3,251 km of national highways and 4,388 km of State’s roads.

Keeping track of the sectors of construction, those who would cater growth of their products, equipment manufacturers share the perception that the demand would be holistically driven from various sectors of construction. As Mr. Pankaj Gupta, Director Marketing, Hilti India sharing unanimous views with Mr. Sharma points out, “demand would be driven both from the higher end of the value chain of construction in the country pertaining to ports, airports, power projects and SEZ’s on one side and also from real estate, housing construction, satellite township and rural road connectivity on the other side with the latter depicting the middle and lower part of the value chain in construction.”

New Funding Pattern to Spur Demand

The Juggernaut to Rumble On
Equipment manufacturers are positive on the present funding pattern of the government for developing infrastructure projects in large volumes. This as a consequence would propel demand of equipment. One of the prime feature of the new funding pattern, is the conceptualisation of Public Private Partnership Programme (PPP) in a large degree by the Government.

This has been done with the intention, since the government and the public alone cannot invest in high capital infrastructure projects to fill in the huge gaps.The much talked about private participation via the BOOT and BOT routes comes handy at this stage. Major construction companies, funding institutions and others are participating in these. It would be notable to know that the ECC division of construction major Larsen & Toubro Limited participated in a number of projects such as the Coimbatore Bypass, Narmada Bridge and Watrak Bridge.

The Juggernaut to Rumble On
Much precisely, to fund Central road and bridge projects the government has constituted a Central Road Fund. The corpus of the fund is formed through certain percentage of cess collected from petrol and diesel. Besides this, the National Highways Authority of India (NHAI), which is a major implementing agency, receives equity support from the Government and a share of its revenues is drawn from cess on diesel and petrol. It has also started deriving sizeable income from tolls levied on users. This apart, the NHAI raises funds from the market through bonds floatation and loans available in plenty from Asian Development Bank and other external sources.

Taking cue of the funding pattern Mr. B.B Gupta, Country Head, Sany Heavy Industries India Private Limited says, “ resource constraint on the part of the government to fund projects is now a thing of past.” This is agreed by Mr. Pankaj Gupta of Hilti.

But nevertheless, both equipment manufacturers and construction companies sound a word of caution saying the decision-making process of the project implementing body has to be streamlined so as to undertake and execute greater volume of infrastructure projects. This is particular for land acquisition and involvement of long gestation period for concerned project. As Mr. I.P Tantia, Chairman and Managing Director of Eastern India based construction heavy weight puts it, “more often than not, the land for construction works is not acquired in advance. Getting land cleared at a latter stage becomes a Herculean task. This at times jeopardises the very viability of the project.” He adds, this has to be rectified with a nodal agency accountable for delays, which should also take charge of land acquisition and utility shifting.

Besides, for larger implementation of projects manufacturers and construction companies hold the view that there has to be general awakening that grand development issues need to be separated from politics. While ensuring amendments, which are in tune with modern times, are executed at a faster pace and law makers must also proactively give attention to the trends of the future BOT projects.

Mechanization Holds Key to Demand

Although the aspect of mechanisation, of the country’s construction industry has caught bit behind of its Chinese counterpart. But the concept of mechanisation is getting much well and fast adopted by the country’s construction industry. This would be a key factor to catalyse future demand of equipment in due course. This is much evident taking in account the demand trend in the present scenario.

Sharing similar views with Mr. R.S Raghavan, M.D, Proman Infrastructure Services Pvt Limited, Mr. B.B Gupta of Sany states, “mechanisation is becoming a standard practice with the country’s construction industry and this practice is being well adapted by the large, medium and smaller segments of construction companies in India. Adaption of this practice in a larger scale, which in all obvious terms would take place and would propel demand of equipment.”

The Juggernaut to Rumble On
The prime reason, behind mechanisation getting well adapted by the construction companies is owing to the fact that, as of date with large volumes of orders hand and in busy time schedule deadline set by implementing agencies, construction companies want to finish the work at a faster pace. This is so as to avoid any penalty clause. Besides, the intention remains that, completion of work at a faster pace would enable the concerned firms to redeploy the equipment at its other site, all on which the company can get better bid margins.

Mechanization is also getting accepted to attain a better quality benchmark set by implementing agencies. Quality benchmark can be attributed, to attain a desired compaction quality in road construction or to get the desired homogeneous quality of cement concrete etc.

But much concurrently with these factors, mechanisation is becoming a standard practice owing to the reason that mechanisation is not a stand alone but an integrated process where a construction firm, undertaking a contract cannot do with a singe equipment but has to rely on wide variety of equipment for completion of a project.

The Juggernaut to Rumble On
This is better explained by Mr. B.B Gupta of Sany. He mentiones, “at a site you cannot do away alone with an excavator or loader. To transport the materials you require a dumper. Similarly, in a road construction project you need both the hot mixing plant, pavers, dumpers, and compactors.” This is a case not only with bigger projects but also with fragmented projects.

And with construction companies getting more focussed on economies of scale to get better cost benefits arising out of cut throat competition, the integration process would get stronger, all leading to demand pull for equipment in the long run.

But a cross section of manufacturers also mention, that to get mechanisation much well adopted by the country’s construction industry, project implementing agencies have to make a move from the present conventional practice of awarding the tenders on cost, rather than on the basis of quality. Besides, to get the best out of the process of mechanization, both implementing agencies

and construction companies have to ensure that there is an equal balance of skilled labor component at the site supplemented with adherence to safety regulations. This is a part where there lies certain lacunae in the horizon of the country’s construction industry.

But a question that emanates from the aspect of mechanization and that can be analysed in future perspective, is mechanization becoming an accepted practice with little variation in technology for a product—doesn’t it mean the equipment market would get saturated in due course? Answering to this question, Mr. G.N. Raju, MD, Nawa Engineers Consultants Pvt. Ltd. states, “mechanisation has to be strongly supplemented by effective sales and service parametres. This is a practice that manufacturers have to welcome across in terms well. Since, this would build up the reputation of the company, manufacturing a concerned product and eventually create sustained demand for the equipment in the market. Similar views are echoed by Mr. T. Ramesh, marketing personnel, Telco Construction Equipment Limited.

However, both the gentleman also add, the stipulated time cycle for usage of the equipment, following which the equipment manufacturers face depreciation. This would anyway create demand of equipment. This can be justified in present context, when construction firms are laden with sizeable volume of work.

The Juggernaut to Rumble On
But since mechanization comes at a cost—could it be accepted that the price sensitive Indian market would adapt the same at a large scale in long on a sustained basis? That too, when margins of construction companies are under pressure due to acute competition? Answering to this, Mr. Sunil Mohan Wig, Director Wig Brothers construction Pvt. Ltd. states, “although margins may be under pressure but as a thumb rule construction companies would cull up the necessary resources to buy the equipment. The equipment would be brought with the perception of an investment made on an asset, and the capital expenditure thus incurred on the same would be eventually recovered by redeploying the equipment at various construction sites by the construction company.”

The view can be taken for granted while taking in account the present swelling order book status of both large and medium scale country’s construction firms, justifying the fact that the equipment can be redeployed at various sites. This is owing to large volume of work in hand.

Rental, A Factor to Reckon

Though there could be host of drivers to pull equipment demand, the country’s rental as per certain circles of manufacturers and construction industry would also enable the demand move on, in a fragmented way and in certain pockets of requirement. This is in tune with the unorganised characteristic of the country’s rental industry. But with bulk of country’s construction companies focussed on owning the equipment in view of undertaking long drawn projects as they share the opinion that hiring becomes commercially unviable in the long run, it may be some time that rental industry could really be a strong driving factor for equipment.

But however, with construction companies in certain quarters showing emphasis on project management as their core business activity rather than getting focused in owning and operating the equipment may sound good for equipment demand to grow through hiring. As Mr. Manoj Uthup, business analyst, Indian Infrastructure Equipment Limited and Mr. Sameer Malhotra from Ritchie Brothers, equipment auctioneers unanimously puts it, “It would be some time for the rental industry to be an important driving factor but going by the present indications the future holds positive on the rental industry being a demand mover.”

However, rental or otherwise it is much certain that demand of equipment would continue to grow. And this is definite. All it would require to maintain the buoyancy, is sustained spending on infrastructure by the Government aided with streamlining the decision making process for project implementation.

The Juggernaut to Rumble On
NBM&CW May 2006
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