Increased pace of road construction is a boon for equipment manufacturers

The increased focus of the state and Union governments on infrastructure build-out, especially roads, metros and railways continues. Projects under the National Infrastructure Pipeline (NIP) and construction activity across real estate and mining sectors are progressing at a rapid pace, which is a good sign and in keeping with the present day requirements. All these developments will be supportive of a strong revenue growth for the domestic construction equipment sector. If a recent study by CRISIL is anything to go by, revenue for the domestic construction equipment sector is likely to grow by nearly 14-15 per cent this fiscal. In volume terms, the sector should see all-time high sales of nearly 1.2 lakh units this fiscal, compared with nearly 1.1 lakh units in the previous fiscal.

And this, according to experts, applies to all types of construction equipment. For instance, earth-moving equipment accounted for nearly 70 per cent of sales volume last fiscal, while material handling and concrete equipment was close to 22 per cent and material processing equipment comprised the rest. It is pertinent to note that the country’s construction equipment industry turned in its best ever performance with 26 per cent year-on-year growth in FY23 as sales crossed the one lakh unit mark driving on road construction and railway demand.

Sales in the fourth quarter of FY23 increased by 23 per cent y-o-y and by 22 per cent quarter-on-quarter over Q3FY23. On a month-on-month basis, sales in March 2023 increased by 17 per cent over February 2023, Again going by the Crisil study, better operating leverage and moderation in raw material (steel) prices are expected to lead to 100-150 basis points improvement in the operating margin of construction equipment manufacturers to nearly 10.5-11 per cent this fiscal. There is no doubt, whatsoever, that the increased pace of road construction (accounting for nearly 40 per cent of construction equipment demand)augurs well for the sector’s growth.

Manufacturers, on their part, are also seeing healthy demand from the real estate and mining sectors, and from contractors of bridges, airports and metro corridors. In addition, some amount of pre-buying of equipment is also likely towards the last quarter of this fiscal, with the sector migrating to CEV Stage-V2 emission norms from April 1, 2024, which will increase equipment prices.

Quite significantly, capital spending by many of the large construction equipment makers is expected to remain at last fiscal’s level of nearly Rs 1,300 crore, which will be largely funded from cash accruals. Accordingly, high working capital intensity is also likely to continue, thanks to stiff competition among manufacturers, with longer credit periods being offered to customers to grab a bigger market share.

An analysis of as many as 17 construction equipment makers, who together account for close to 75 per cent of the sector’s revenue, indicates that the consequent improvement in cash accruals and moderate capital expenditure will help offset the impact of higher working capital borrowings and keep debt metrics healthy.