Indian Construction Equipment Sector - Progressing with some hits and misses

S. A. Faridi

CE Sector: Then & Now

The first decade of the 20th century has been a golden period for the equipment sector, as the industry enjoyed unprecedented growth during 2004 to 2011. If one recalls, in 2010/11, it began to appear as if the industry’s growth would not abate at all, prompting many equipment manufacturers to invest heavily in ramping up their production capacities. Unfortunately, due to some unresolved policies and issues, construction in many projects began to stall, and an atmosphere of uncertainty began to prevail in the industry, resulting in a steep decline in demand.

According to Off Highway Research India, figuratively, demand peaked at 72,492 units in 2011, but sales could not be sustained at this level due to the ‘policy paralysis’ phase of the previous government. Market declined by 9 per cent in 2012; 16% in 2013; and a further 14% in 2014 to settle at 47,991 units. In 2014, when the new government was elected on its development agenda, it started sorting out unresolved issues and impediments on war footing, and within 18 months, the infrastructure & mining sectors began to pick up steam. The roads and mining sectors were among the first to come back on track.

After slowing for three consecutive years, the trend reversed, and the market grew by 2 percent to 48,913 units in 2015. The policy and administrative decisions of the new government to push the pace of infrastructure development showed very positive results in 2016, and sales of construction equipment increased by 36% to 66,613 units.

Infact, 2016 was the defining year when business confidence returned to the industry, lifting the sentiments of the equipment manufacturers who began getting returns on the investments they had made some years ago. No one had expected that in 2016 growth would reach 25 to 40% across different equipment segments, and hope for the coming years was once again reignited.

Then came three unexpected and fast-paced reforms by the Government, for which the 80% cash-based Indian economy was not ready. Demonetization and GST, which despite being bold, far-sighted and important for the country’s overall economy, dealt a severe blow to the CE industry, and its growth slowed down significantly in 2017.

Infrastructure: Initiatives, Ground Realities, Prospects & Challenges

In the last 40 months of coming into power, the government has taken important steps to streamline the economy. It is natural that when new policies are introduced, there will be some hiccups, and the impact will take some time to be visible on the ground.

New policy measures were announced to make the business environment more conducive and transparent. GST, the biggest reform, is no doubt, a game changer in our taxation system as it will bring the much-needed ease of doing business, and hopefully, catalyze growth of the infrastructure sector. Much of GST’s success depends on implementation. But the last four months have been quite tough for the industry and the government. due to lack of clarity and concerns about the high tax rate of 28% on construction equipment. Small time hirers and contractors have been especially affected as they have not registered for GST, and therefore, cannot enjoy the benefit of 100% cash back. Recent reduction of GST rate for construction equipment from 28 to 18% will also boost sales in the future, although it will have a marginal effect in the short-term.

If you look back at the last three and half years of the government’s work, you will see that the pace of capacity creation and project awards have increased in each sector and to an extent that most developers and contractors have enough jobs in hand. The government is trying hard to bring in both overseas and domestic investments in infra development. A few new sources of funding are being opened up, but it will take time for the funds to come on ground.

The government has also passed many laws and policies pertaining to insolvency, bankruptcy, arbitration, coal linkage, HAM, easing of FDI norms, off-take of stressed assets, and so on. All these have started showing positive results on the ground. The road sector is witnessing a record number of project awards as well as speedier construction. MoRTH is working towards resolving all issues with stakeholders to bring back the PPP model on track. The Model Concession Agreement (MCA) has been modified and is being made more balanced. HAM has been quite helpful in lifting the sentiments of the developers and contractors. The entry of new contractors in the sector also affirms that road sector is on the highway to progress.

Likewise, many initiatives have been taken to fast track Railways with redevelopments and modernization of stations, DFCs, focus on safety, high-speed rails, etc, all of which will bring huge opportunities for the CE industry. However, not much activity is currently visible on ground.

Reforms initiated in the Power and Renewable Energy sectors is leading to renewed growth in two sectors. The Irrigation sector is being revived with renewed vigor, as seen in the states of Telangana and Maharashtra. However, funding of projects in these sectors remains a major cause of concerns. Capacity additions in Ports, and greenfield airport projects in Mopa and in Navi Mumbai, have brought hope to these sectors.

Hamm HD 99

There are numerous other projects in the pipeline, which indicate the government’s intent for infra development, but delays in their implementation is worrying the industry. Key issues such as land acquisition, poor project planning, private investors’ apprehensions on the bankability of the projects etc, need to be resolved quickly by the concerned ministries to bring back private investments, without which it will be difficult for the government to build world-class infrastructure.

Demand Drivers

Equipment sector which has seen growth of 12-15% in 2017, is expected to see heightened business activities and an estimated growth of 15-18% during 2018–19, as the government is likely to invest heavily in infrastructure sector thereby lifting business prospects in CE sector prior to the elections in 2019.

Based on the trend seen over the last three years in infra development, we foresee that the road sector will continue to be the main growth driver for the CE industry. As 2018-19 will be the last budget year for this government’s five-year term before the elections, the government will accelerate the implementation of its big, ambitious schemes and projects that were announced in the last three years. These include Smart Cities, Sagarmala, Jal Marg Vikas, AMRUT, Housing for All, the Diamond Quadrilateral for high-speed railways, river linkages, the bullet train, besides roads and highways. The upcoming business scenario across sectors looks buoyant, and manufacturers should gear up for the coming years.

The government’s recent decision of remonetizing banks with `2.11 lakh crore, and approval of 83,000-km of highway projects with an investment of over `6 lakh crore, will further spur construction activity in the country, which will result in higher GDP and employment generation opportunities, the two major macro-economic challenges this government confronting currently.

It is expected that the capital infusion will increase credit demand and thereby economic activity. There might be an economic slowdown for a few months, but corporate credit growth momentum should pick up from the first quarter of the next financial year.

All of this, along with the ongoing infra development schemes, will lead to sustained growth of the CE industry for the next few years.

Growth Prospects

All ongoing infrastructure projects are being monitored at the highest level, and the concerned ministries/authorities are taking corrective measures and policy initiatives to remove any obstacle that could hamper progress.

The current macro-economic scenario in the country is very stable as inflation is expected to remain below the targeted 4 percent; foreign exchange reserves are over$400 billion for the first time; fiscal deficit target of 3.2 percent is expected to be achieved; and the current account deficit is under 2 percent.

The government investments are also targeted towards infra development, and it is taking forward its reforms agenda at a brisk pace. However, demonetization and GST have had an adverse impact on the country’s GDP, as have the huge NPAs of the public-sector banks on their credit growth.

Infrastructure projects have long gestation periods, and apart from planning and execution issues, legal and procedural problems may arise during the construction phase. These create uncertainty in project execution, and perceived risks by investors and financiers. However, the over-riding fact is that there remains a massive amount of construction work yet to be done in the country, which will call for large volumes of construction equipment.

Key observations of 2017

When NBM&CW spoke to over 30 big equipment manufacturers in last quarter of 2016 on their anticipated growth prospects in 2017, they were optimistic of a 15-22% growth across different segments. The percentage envisaged has now come down to 10-14%.

As per Sameer Bansal, Director – Off-Highway Research India, the sales of construction equipment, which increased by 18% in the first half of 2017 as a result of the pre-GST push for sales by most manufacturers, will probably moderate in the second half. Accordingly, demand for the full year is expected to grow by 9 percent to 72,745 units in 2017, which is lower than industry expectations.

The key observations of Off-Highway Research for the first half of 2017 are:
  • The structure of the construction equipment market has remained largely unchanged with backhoe loaders, crawler excavators and mobile cranes continuing as the three leading volume products, and together accounting for 78% of the CE market.
  • Share of backhoe loaders declined to 41%, while that of crawler excavators increased to 28%, and mobile cranes grew to 9 percent.
  • Crawler excavator is the fastest growing major equipment; which reflects the strong growth in construction activity.
  • Mobile compressors’ representation declined to 6 percent, while wheeled loaders’ share in the first half remained unchanged at 4 percent.
  • The share of compaction equipment increased to 7 percent on account of the government’s focus on road development.
  • Share of motor graders, asphalt finishers, mini excavators, rigid dump trucks, skid steer loaders and crawler dozers remained unchanged, and individually they accounted for 1 percent of the total market, except for motor graders whose share increased to 2 percent.
  • All other equipment, rough terrain lift trucks (RTLTs), crawler loaders, wheeled excavators and articulated dump trucks individually accounted for less than 1 percent of the market. Motor scrapers are not sold in the country.
Forecasting an Upward Trend for the Next Five Years

Sales Forecast of Construction Equipment 2016 2021
Off-Highway Research in its study concluded that the market for construction equipment will follow an upward trend in the next five years. There are no indications to suggest that the market will ever decline in any particular year, during the next five years.

According to Bansal, the market will grow by 9 percent to 72,745 units in 2017 and a further growth of 9 percent to 78,970 units in 2018. However, growth will be modest in 2019 due to national elections, and thereafter grow 8 percent in 2020 and 5 percent in 2021. Demand is likely to exceed 90,000 units in 2021.

Almost all types of equipment will witness growth, but the market will continue to be dominated by the six most popular products: backhoe loaders, crawler excavators, mobile cranes, mobile compressors, compaction equipment, and wheeled loaders, which together, will account for 93% of the market in 2021.

Importantly, equipment that has been selling in small numbers in the past, such as mini excavators, rough terrain lift trucks, and skid-steer loaders, may see demand increase considerably. Demand for less frequently purchased equipment such as articulated dump trucks, crawler loaders and wheeled excavators will be driven by specific orders, but no future pattern can be predicted for them with any degree of certainty at the moment.

Indian Construction Equipment Sector
Sales and Forecast of Construction Equipment, 2016-2021* (Units)
  2016 2017* 2021 % Change 2016 - 2021*
Articulated Dump Trucks - 10 10 -
Asphalt Finishers 776 850 1000 +29
Backhoe Loaders 29,847 31,500 34,000 +14
Compaction Equipment 3,865 4,500 4,700 +22
Crawler Dozers 435 600 700 +61
Crawler Excavators 16,491 18,500 30,000 +82
Crawler Loaders 2 5 5 +150
Mini Excavators 857 1000 1500 +75
Mobile Compressors 4,678 4,500 5,500 +18
Mobile Cranes 5,492 6,500 7,000 +27
Motor Graders 888 1000 1100 +24
Rigid Dump Trucks 343 450 700 +104
RTLTs 146 200 350 +140
Skid-Steer Loaders 546 625 650 +11
Wheeled Excavators 1 5 5 +400
Wheeled Loaders 2,206 2,500 3,400 +54
Total 66,613 72,745 90,620 +36
Annual % Change +36 +9 +5  
* Forecast
Source: Off-Highway Research
Reworking Business Strategies

Product Improvisation, Increase in Exports Integrated Customer Services, Automation led by IoT, Evolving Rental biz

Escorts EG0A2065
When the CE market started to decline in 2012-13, it was quite clear that it would take a long time to rebound. Not willing to simply wait and watch, equipment manufacturers started looking at other avenues of business. Export to the developing third-world countries emerged as a possible way to enhance production. The manufacturers started improvising and upgrading their products to match international quality standards, and they began to explore other markets as well. As Indian equipment is known for being cost competitive and reliable, the export markets of South-East Asia, Africa and Middle-East were quick to accept their products.

This prompted many multinationals with manufacturing facilities here, to make India their export hub. Currently, Indian CE companies are earning around 20% of their revenue from exports, from the earlier 5 percent only in 2010, and they are exporting almost the entire range of products from crushers, earthmovers, asphalt/concrete batching plants, to air compressors and road construction equipment, to over 100 countries across the globe.

The surge in exports has brought about a positive change in the industry’s approach to domestic sales, with many manufacturers imbibing international practices with respect to quality and safety. They are also enhancing customer service and support by offering integrated services from sales to commissioning of their equipment at the customers’ job sites. With a view to building long-term relations, they are advising customers in the selection of equipment as per their project needs, helping them to get financial aid, ensuring timely delivery of their equipment, providing operator & mechanics training for their machines, and conducting periodic checks on the equipment to preempt any breakdown till the project is completed.

As India is a value driven market, new buying parameters like total cost of acquisition, operating cost, return on investment etc. have become the norm. Equipment manufacturers are accordingly upgrading their machines to bring in fuel efficiency, better performance, and lesser wear & tear. They are improving the overall equipment design, and adding more automation to enhance ease of operation.

For Indian buyers, the initial low cost of the equipment is a big factor, and are therefore unwilling to pay more for technically advanced machines, which actually give better ROI in the long term. However, manufacturers are beginning to add advanced features in their equipment as they are confident that the Indian market is maturing. Features such as telematics, diagnostic and machine control systems have become standard in many equipment. Systems such as GPS, site management, and fleet management, which can be integrated with the ERP software, are bringing higher efficiency and improving the project’s overall profitability.

India’s rental equipment business has a long way to go before it becomes a preferred choice for contractors. About 70% of the rental business is coming from the unorganized rental companies, who give no assurance of reliability, safety or performance of the machines. However, we do see some of them evolving and partnering with bigger contractors. The recently formed ‘Construction Equipment Rental Association’ (CERA) aims to bring all rental companies under its umbrella to resolve common issues, improve business dealings, share job opportunities, and bring reliability and transparency in their businesses.

Business Platform – Excon 2017

For those involved, directly or indirectly, in the infrastructure construction sector, Excon 2017 is a must-visit exhibition. Here, leading equipment manufacturers will showcase their technologically-advanced equipment and machinery, and launch new products. It’s a big platform for component manufacturers as well to showcase their products & technologies.

Excon is also the right platform to meet prospective clients, meet existing customers, attend conferences by industry experts, and interact with the who’s who of the CE sector.

NBM Media team has interacted with over 150 participants to elicit information about their business strategies, manufacturing capacities and product advancements. What emerges is that most manufacturers, in the last one year, have seriously undertaken R&D for developing or upgrading their products to enhance productivity, bring about more fuel efficiency, and better operator performance through electronic controls, all-round visibility, and comfort in the cabin. They are also charting out strategies to become total/integrated service providers by catering to every need of the customers.

Another talking point in this year’s show will be the IoT (Internet of Things), which is driving solutions such as telematics and diagnostics for tracking, maintaining and servicing equipment.

So, those who are yet to make up their mind, don’t delay. Book your ticket and be there. It’s going to be the most exciting week for all of us.

NBM&CW December 2017

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