Saturday, January 16, 2021

Equipment Sphere

Mining low


Demand in the Indian mining and construction equipment sector has hit a new low on weak infrastructure and reduced investments, as per a report by ICRA


Slow moving / stalled projects and weak investment pipeline across infrastructure sectors and excess capacity has resulted in subdued demand for construction equipment across the country. While the performance of individual companies varied depending on product mix, distribution strength, product value proposition (in terms of owning and operating cost, product reliability, downtime, added features and technology) and new launches, the overall industry volumes suffered (decline of 15-17 per cent estimated in 2013-14) resulting in declining revenue for most companies in this sector. Further, industry margins continued to shrink with unfavourable forex rates inflating input costs (given the significant import content in this industry) even as the ability to pass through the same to the end consumer remained limited given the competitive pressures. Volumes are expected to remain subdued during 2014-15 also with a muted 2-4 per cent growth given current investment environment and the presence of idle inventory.



Subdued business


In India the economic indicators have remained subdued during April-December 2013-14, with general IIP growth contracting by 0.1 per cent, primarily led by a 1.8 per cent decline in mining IIP and a 0.6 per cent decline in manufacturing IIP. Gross Fixed Capital formation (GFCF), a critical driver for the Mining & Construction Equipment (MCE) segment, has slowed down significantly, particularly from the private sector due to weak economic environment. New projects announced and completed fell to a two year low in December-13 (despite the large announcement of three ultra mega power projects (UMPP) in the December-13 quarter), while projects shelved climbed to a six year high of 178 per cent of projects announced (in quantum).



Shrivelled MCE demand 


The Indian CE industry is witnessing its second consecutive year of volume de-growth during 2013-14 with volume demand estimated to fall by around 15-17 per cent to ~55-56,000 units. This decline comes close on the heels of 8-10 per cent de-growth witnessed during 2012-13, when industry volumes fell to ~66,000. Prior to this, the domestic CE industry witnessed two years of healthy growth of 21 per cent and 45 per cent pa; over the past six years, we have typically been witnessing two year cycles of contraction and expansion in the domestic CE industry, correlating with the economic growth and construction activity in the country. However, given the current investment environment, no major uptick is anticipated in the industry during the first nine months of 2014-15.



Regulatory roadblocks


The industry is currently mired in regulatory hurdles for all major mined resources. This long drawn uncertainty has impacted several miners and consequently the mining equipment industry. During 2013-14 demand for mining equipment is estimated to have contracted by over 30-40 per cent in the private sector. The upside for 2014-15 from this segment is limited till the regulatory hurdles are resolved.



Slow infra investments


MCE demand depends on progress in investments in various infrastructure sectors. This segment analyses the    current scenario, key projects in the pipeline, their status and potential for MCE demand from each of the key drivers in the construction space.

  • Roads: Plagued by lower than anticipated traffic and delays in regulatory clearances; reducing projects viability, constraining financial closures and execution delays; policy changes necessary to revive business confidence.
  • Industrial Corridors: Large investments anticipated in the long term; with government focus and funding availability, timely clearances and efficient execution hold the key.
  • Urban & Rural Infrastructure: Increasing fund allocation underlines Government focus; execution efficiencies would be vital for sustainable growth in investments.
  • Real Estate: Adverse buyer sentiments and regulatory pressures impacting demand; turnaround unlikely before the second half of 2014-15.
  • Railways and Metros: Large investments on the cards; timely clearances / approvals would remain critical.
  • Oil & Gas pipelines: Strong ‘pipeline’ of projects support long term demand prospects; however, land acquisition issues continue to impede the pace of execution.
  • Airports: Investment climate to remain buoyant driven by policy support and increased private sector interest.
  • Power: Industry grappling with fuel deficit, policy amendments, fuel supply agreements (FSA) likely to provide the much needed shot in the arm.
  • Ports: Welcoming fresh investment cycle amidst subdued volumes.



New project Announcements


Dampened business sentiments, stretched financial position and pressure on cash flows of private construction players has had an adverse impact on new project announcements and the share of private players in new orders declined from 77.1 per cent in December-2012 quarter to 12.6 per cent in December-2013 quarter. Additionally, the absolute investments from the government in new projects has also declined from the December-2009 quarter and touched a new low in almost eight fiscals to Rs. 125 billion in December-2012. While the investment in new projects announced by the government is on an uptrend for the last four quarters, the same from private players continued to witness a sharp decline. Resultantly the share of government in total announced investments increased to 87.4 per cent in the December-2013 quarter. The new project announcements from the Government (both central and state) is expected to remain robust in Q4, 2013-14 as indicated in speed-up of awarding clearances to new projects in the past few months.



Weak economic profile


Over the past two to three years, construction companies in India have witnessed considerable weakening in credit profile with escalating debt levels, stress on working capital and increasing interest costs eroding net margins (ICRA rated portfolio experienced an inverse credit ratio at 2.1 over the last eighteen months ending December-13). Under-utilisation of assets, heightened competitive intensity and increase in input/labour costs has also impacted performance. While revenues have grown at a healthy clip till 2011-12, the last few quarters have witnessed significant slowdown with increasing proportion of slow moving orders creeping into the sizable order books. With the country going into election mode shortly, order execution is likely to slow down in the three to six months leading to muted revenue growth in Q4, 2013-14 and H1, 2014-15. A dealer check has suggested nation-wide de-growth in MCE volumes, low business confidence with recovery hopes pinned on expected revival in investment cycle.



Financing caution


The MCE financing book has declined by 1 per cent in H1, 2013-14. Additionally, financial position of equipment buyers has been under pressure for the last two years (growth in financing slowed down to ~10 per cent in 2012-13, against 38 per cent in 2011-12) on account of overall slowdown in the capex cycle and the liquidity crunch in the industry- resulting in lower capacity utilization and delays in payments. The position is further worsened by depreciation of the rupee against the US dollar as part of the larger construction equipment requirements are met through imports.



Hope ahead


Over the past five years, the Indian Rupee has witnessed significant volatility. During the current fiscal, while the USD remains strong, there has been some correction in the Yen. In late December-2013, the Yen slumped to a five year low against the USD on continued fiscal stimulus in Japan. Players like Case New Holland, Kobelco India, Wirtgen, Komatsu India, Tata Hitachi Construction Machinery, among others, with a high import content (especially for higher tonnage equipments) have been impacted adversely.

This  has  also lead to stepping up of efforts by local manufacturers on localisation of components - a positive development over the longer run. No sizable capacity creation/ investment announcements have been heard of in recent times in the MCE space.
However, given the long term prospects of the Indian market (with its infrastructure requirements) - global majors like Caterpillar, Komatsu, Kobelco Construction Equipment India Private Limited (KCEI), among others, have reiterated their commitment to a larger Indian presence in times to come.




In China, North America, Australia, Indonesia, Brazil, Peru, Chile the other key global markets that drive demand for mining equipment - weak commodity prices have taken the wind out of sales for global mining equipment. Investment in mining equipment and mines globally is a function of the prices for minable commodities. While commodity process have recovered since sharp corrections in 2008 (post global financial crisis) – the relatively sluggish global economic environment remains a drag on commodity prices. In view of the softer to flat commodity price outlook for 2014, global mining heavyweights namely Vale SA (the biggest iron ore producer), Rio Tinto Group (the world’s second largest miner and biggest aluminium producer) and BHP Billiton, the world’s largest coking coal miner, have all announced plans to slash investment budgets.

China is the largest market for construction equipment demand globally and has long been a key market in the fortunes of the global CE industry. Revival in Chinese demand for CE, continued requirement of CE for rebuilding activities in Japan (post the Great East Japan Earthquake) and Thailand (post the floods) have supported demand for the equipment even as other markets like India de-grew, leading to overall flat global CE markets during H1, 2013-14.  Demand for replacement parts which was weak in 2013, could however pick up in 2014 and 2015; currently mining companies are lowering their operating costs by working their newer machines extra hours at the expense of older machines, thereby deferring parts replacement. But this pent up demand is expected to catch up in 2014. 

Source: ICRA

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