Q: The earthmoving equipment and road construction equipment account for close to 70% of India’s construction equipment market. Do the government initiatives on infrastructure development make a real ground-level change and reflect a shift in policy?
A: NIP is a USD 1.4 trillion government investment plan spread over the next five years. Of this, the centre and state account for 39 % each and the private sector 22%.
About 40% of these projects were already in various stages of implementation before being brought under the NIP umbrella. Road projects constitute 30% of those under implementation. The rest are at a conceptualisation or under development stage.
This pipeline brings a greater focus and transparency in pushing the projects towards execution and helps continuous monitoring through a dashboard.
Road project awards during April-October 2020 have grown >90%, and this is driving demand. Twenty-three Expressways have been announced with target completion dates between March 2023 and March 2025.
The lockdown caused by the pandemic caused severe disruption at project sites, but the situation is fast returning to near normal.
The problems of land acquisition, and financing through new models have still not been fully resolved, and they are causing unevenness of demand.
Q: In the COVID-impacted market, how did you manage your cost and the inflationary pressure on the input side?
A: The challenges we faced were three-fold: Disruption to supply chain, commodity-led inflation on input costs, and overheads.
Disruption to supply chain: The sudden lockdown resulted in all forms of transportation and logistics coming to a standstill. Many of our inward consignments were stuck on the road, at ports, or on the high seas. Similarly, our dispatches to customers which were on the road in-transit got stuck en-route. For road transport, the added pressure was of drivers abandoning vehicles due to uncertainty resulting in problems of traceability. Ports were shut, and shipping lines levied Container detention charges on importers due to such delay. All such costs had to be absorbed.
Commodity-led inflation on input costs: Severe disruption led to the erratic behaviour of the cost of steel, an important input in our industry. The disruption cost at steel mills was a critical element to be encountered.
Overheads: We had to face the brunt of revenues drying up because of negligible demand. The focus was on retaining our key resources during this troubled time. We implemented the ‘Work from Home’ concept in support functions by leveraging digital and IT platforms resulting in minimal disruption to our day to day operations. There was, of course, tight control on discretionary spends, and travel budgets were not being utilised due to safety concerns and restrictions.
The Q2 FY 21 volumes grew 20% and this also was helped by a low base effect in the corresponding quarter last year.Sandeep Singh, ICEMA President
Q: Is the high cost of fuel impacting the sector? The economy has started seeing some green shoots, how will it affect the performance of the CE industry in the coming quarters?
A: The country has seen a steady increase in fuel cost over the last decade. Needless to say, fuel constitutes a big part of the operating cost and impacts the cash flow of all customers.
Therefore, customers attach paramount importance to fuel costs.
The industry is cognizant of this fact, and the manufacturers have been addressing this in two ways:
Enabling the use of fuel-efficient engines; and adapting better hydraulics that improves energy efficiency and delivers better output and performance.
In keeping with the customer requirements, Tata Hitachi has introduced an efficient range of excavators under the EX-Super+ and Zaxis GI series, and our SHINRAI Backhoe loader, the highly fuel-efficient and India’s first hydrostatic wheel loader, TL340.
Q: Do the need for rapid infrastructure creation and the opportunities in creating quality infrastructure help the sector? Many of the sectors are stuck in delays and non-payments, is the demand consistent?
A: Rapid infrastructure development and creating quality infra are definitely the backbone of demand generation for our sector.
Over the years, the Central government concentrated on scaling up the investment in the roads & highways sector, railways, aviation, ports, smart cities etc.
The state governments focused on the investments in other sectors like rural roads and district roads, irrigation, water supply, power, airports, social infrastructure to move up the scale on ease of doing business as well as improve the quality of life for their citizens.
All these investments contributed to the rapid growth of the CE sector in the past five years.
However, with the scaling up, came issues related to land acquisition, various clearances, financing of the projects etc. We have seen activities peak in FY18 and FY19.
Some changes in approach to strengthening the land acquisition pace (although positive for the long term) by NHAI / MoRTH as well as cyclical state elections and change of state governments significantly impacted the CE sector in FY20. Later this year saw the impact of COVID-19.
Therefore, yes, there is always the challenge of consistency in demand. But with the central government coming up with NIP and phased investment programme and the states expected to recover from COVID-19, we are optimistic of the direction of demand in the future.
The lockdowns impacted our programme of meeting the emission norms as testing of machines and supply chains were disrupted.Sandeep Singh, ICEMA president
Q: What’s the outlook for the CE sector? Are sales picking up? Has there been some improvement in demand? When is any revival likely and when is a turnaround expected?
A: It must be understood that the CE industry was down by 20 % even before the COVID-19. The financial crisis in the aftermath of the ILFS default has already impacted our industry, especially because of our heavy dependence on NBFC funding.
The lockdown and its immediate aftermath almost brought a complete halt to our business. Factories were largely shut; the movement of finished goods and inputs were affected. On the demand side, works at project sites were impacted because of the migration of labour and restriction of movement. Q1 volumes were down 60% YoY.
The Q2 FY 21 volumes grew 20%, and this also was helped by a low base effect in the corresponding quarter last year.
Hence H1 registered a de-growth of 25%. October also saw the momentum continues with the industry clocking 20% growth. We expect this recovery to continue in H2, even though we may still end up negative in FY21.
All these will depend on the Infra push of the government accelerating, easy availability of Financing and Construction companies emerging with stronger balance sheets.
Q: How is the industry coping up with the new regulations? What are the advantages of minor relaxation in the implementation of emission norms? Will it help in bringing cost efficiencies to the sector?
The CE industry has been very proactive and has been continuously engaging with the government as well as the regulators in jointly working suitable and appropriate regulations to make the industry safer as well as to attain world-class standards.
The implementation of BS(CEV)-IV emission norms for construction vehicles that ply on roads was to have been implemented on October 1, 2020. The lockdowns impacted our programme of meeting the emission norms as testing of machines and supply chains were disrupted.
We had several interactions with the Ministry of Road Transport and Highways, including the Union Minister, MORTH, as well as the Minister of State. They were very supportive and helped the industry by extending a window of six months to complete the process of this transition.
This will help the industry reboot the supply chain and also work with testing agencies to stabilise the manufacturing programme for the new products.
The new norms will require additional investments in the equipment and these would obviously add a sizable cost component.
Q: How will the higher raw material price, like the recent increase of INR 2,000/tonne of steel, impact manufacturing? Can India emerge as a manufacturing hub for construction equipment given the ‘Make in India’ initiatives for productive manufacturing? What do you seek from the government?
A: Higher raw material prices are a concern for the industry. Steel prices were moving up even before COVID-19 hit us and its impact was short-lived. From August, the industry has been seeing higher steel prices, and within three months domestic HRC prices have gone up by nearly 20% from the post-COVID-19 low of INR 35,000/tonne in July to INR 41,700/tonne in September.
This sort of volatility and high cost of raw material will impact not only the product prices in the coming months but also the financials of the companies in this sector.
We have taken up this issue with the government, as it will affect both the domestic CE industry and impede the government’s move to make India the manufacturing and capital goods base for exports.
For the CE industry, more than 90% of the volume of machines manufactured in India are localised to the extent of 50%.
This is an average figure, and some manufacturers have more localisation. These include the equipment sold in the largest volumes such as hydraulic excavators and backhoe loaders.
A large base of vendors has been developed over the years. Many of them are in the MSME category. So, there is a fairly robust manufacturing base in the country.
Components that are imported include precision aggregates such as valves, hydraulic motors, electrical sensors and undercarriage assemblies. Because of the high investment cost, volumes are required to set up manufacturing units in India for these components. This can happen through enhanced local demand through infra investments and export incentives.
If the right conditions for global investment are created, we can enter into partnerships with global players and service the Indian market as well as the global supply chain. We will have to grow our competitiveness to attract these opportunities against other countries doing the same. Some of our inherent common manufacturing disabilities such as land acquisition, cost of capital and logistics, need to be addressed. They put us at a cost disadvantage.
Another disadvantage is the cost of steel, a critical raw material, compared to what prevails in other markets.
Q: Are the banks and NBFCs still cautious about lending for new CE? Which construction equipment segment has constant demand? Which is the new winner, the backhoe loader or any other product? What kind of demand is emanating from the market?
A: As has been mentioned, the CE Industry witnessed de-growth in FY20. The lockdown further compounded this. From a negative growth of 50% in Q1, H1 has regained some lost ground but still is at negative by 25%. The Q2 and October sales have shown some significant gains, but that again is also because of a poor quarter a year ago.
The backhoe loader market has shown better growth than the other product categories in Q2, almost regaining the same size as when seen cumulatively against H1 of last year. But the other product categories continue to lag when compared to the highs of FY19. Some of the other product categories like excavators and road equipment have also shown significant growth in the last 2-3 months over the same period last year due to the restart of construction and road-building activity.
The good monsoon last year leading to a record Rabi output and a good monsoon for the second consecutive year has supported the backhoe loader demand in the rural market.
This has been further boosted by the government focus on rural infrastructure, including PMGSY (rural roads) as well as PMAY (rural housing). They have also promoted the mini excavator market.
We expect the recovery to continue for other products too over the next few months.
Q: Do you think rentals will gain prominence in the post-COVID time, considering the financing and cost issues in the market?
A: The CE market in India lags the world in having an efficient and sizable rental business model.
Post-COVID, there will definitely be a move to expand this business as the companies will shift to an efficient allocation of resources and capital.
We see an initial movement towards organised rentals and the benefits of cost, quality and customisation are being recognised.
We have already started our rental business on a pilot-scale last year and look to expand it with machines having special attachments and through increased customisation. These will be backed by a commitment to the upkeep of the rental units and an assurance of the usage hours.
Q: How ready is India’s CE sector to embrace new technologies like IoT and automation?
A: There has been considerable penetration of technology in the CE sector. This applies to the manufacturing plants and that embedded in our products. The pandemic has only emphasised the need for increased adoption of these technologies.
One example is the extensive usage of telematics in construction equipment. ICT enablement helps generate data pertaining to equipment usage hours, the efficiency of use, location, alarms for system malfunction and so on. These reports help in preventive maintenance, better utilisation and monitoring of assets, and geofencing.
Another example would be the use of fleet management systems for optimal use of assets at project sites.
In mining applications, there is an increased use of autonomous drives and higher use of technology in safety Systems.
Q: Is there any contraction in the dealer network due to stalled economic activity and muted sales?
A: Stalled economic activity certainly had a big impact on our dealer operations. The overnight drying up of sales and the resultant loss of revenue left many of our dealers struggling.
We supported them to maintain essential operations during the lockdown by accelerating the process of payments and clearing of past dues.
We also utilised this time effectively by providing continual online training to the dealer staff and keeping open, effective lines of communication. Customer contact and training were also delivered through digital platforms.
There has been no contraction in our dealer network. Our network is based on the present, and future needs of the business and hence will continue to grow.
Q: How are exports faring? Is there any revival in the overseas markets giving the Indian manufacturers a chance to export and maximise production capacities?
A: We export directly to SAARC nations and through the Hitachi Construction Machinery Company network to West Asia and Africa.
Exports are not a significant contributor to our turnover, and even as an industry, not more than 12% to 15% volumes are from exports.
COVID-19 has had a big impact on all countries we service and more so in the SAARC region. We see some recovery in Bangladesh, Africa and the Gulf region. For the rest of the world, it will depend on the global economy and path to recovery. The IMF has announced that global recovery has been faster than anticipated and it might revise global growth forecasts.
The CE industry has the manufacturing capability to address these opportunities from overseas and expand it further if some of our needs are met.
Q: How are the states making a change in the need for rapid infrastructure creation? Which are the most progressive states that are leading the shift to emerge as leaders in creating quality infrastructure and improving their human life index?
A: States have made the right moves to improve the quality of life by inviting investments in infrastructure. There is competition among states in getting investors to come in, and they are showcasing various benefits and incentives. Today 60% of the total Capex is coming from the states.
They have realised the importance of bringing down the logistics cost by providing quality communication links – therefore, the focus on developing district and village roads as well as state-led expressways. Other initiatives include upgrading water and sewage networks, urban transportation and irrigation projects. States like UP, Maharashtra, MP, AP and Telangana have already begun this process.