ICRA: Huge infra spend heightens Construction Equipment Volumes

The increased focus on construction and infrastructure spending, particularly in the road infrastructure segment, has led to a sharp rise in Construction Equipment volumes since July 2020. The agency revised its outlook on the CE sector to Stable from Negative following a strong ramp-up in volumes. As per the agency, factors such as a sharp increase in awarding and execution pace of road construction; increased focus on rural infrastructure; strong rural volume off-take for equipment on the back of second consecutive good monsoon; improving demand from railway and mining segments and the regular payment flow from the government to contractors has supported healthy revival in industry volumes over the last few months. Besides, demand has also been supported by steady inflows from the central government on infrastructure spend, particularly on roads, even though state infrastructure expenditure has been severely curtailed and diverted to the pandemic management. According to Pavethra Ponniah, Vice President and Sector Head of ICRA, following a sharp correction in unit sales in Q1 FY2021, CE OEM volumes have recovered sharply, supporting the industry credit profile. Raw material price hikes, particularly for steel, have however had an impact on profit margins. OEMs are expected to take further price hikes to pass on these cost pressures. However, the agency pointed out that continued limited fiscal bandwidth with state governments to invest in infrastructure and the price hikes following the upcoming emission norm change in April 2022 as two critical demand headwinds in the coming quarters. State governments are key contributors to the infrastructure activity in the country. Modest growth in SGST collections, delays in receipt of GST compensation, and the reduction in the central tax devolution to the states in FY2020 below the level budgeted by the government have complicated the liquidity management of the state governments.