ICRA RESEARCH SERVICES Indian Mining and Construction Equipment Industry Demand revival still appears couple of quarters away Corporate Ratings Contacts: Subrata Ray +91 22 6169 3300 subrata@icraindia.com Pavethra Ponniah +91 44 4596 4314 pavethrap@icraindia.com Swathi Hebbar +91 80 4332 6404 swathi.hebbar@icraindia.com Anand Kulkarni +91 20 2556 0195 anand.kulkarni@icraindia.com June 2015
MCE demand appears to be nearing bottom Demand revival still two quarters away In line with expectations, MCE demand during 2014 contracted by over 15% to 46-47,000 units from 72,100 three years back in 2012. While the volume decline was felt across all product segments during CY2014; segments such as backhoes and heavy mobile cranes were some of the worst impacted while wheel loaders fared a tad better. Road compaction equipment also suffered on the sharp slowdown in implementation of road projects during the election period in H1, 2014-15, but has since picked up moderately. MCE demand during 2014 contracted by over 15% to 46-47,000 units Despite various reforms related to the infrastructure segment, the MCE industry did not witness traction in demand during the first half of CY2015 also. Projects being stalled/shelved and abandoned continued to plague the marketdue to sector specific issues, product viability issues and in some cases due to promoter cash flow constraints. However, we believe that demand in the Indian MCE industry will pick up towards the end of the current fiscal (October 2015 to March 2016), with demand for MCE expected to grow by 6-7% during 2015-16, followed by a sharper pickup of 20-25% during 2016-17. 2016 promises to be a better year for most of the product segments as a result of the ongoing policy measures leading to absorption of surplus inventory in the market. Scale up in demand for MCE is often non-linear, with assured job orders and cash flows triggering strong buying, as construction activity picks-up momentum. Our extensive interaction with the industry threw up a few interesting demand blips for the past six months; absolute demand for backhoes suffered significantly more than the demand for excavators; equipment utilisation is abysmally low at 50-60%; wide disparity in demand across several States; and the return of few large contractors in niche pockets. Financing landscape however has worsened with delinquencies expected to climb further during January-September 15, making equipment financing a potential constraint for the market. Progress across core industry sectors continues to be slow In the last one year, the GoI has announced several policy measures aimed at improving ease of doing business, clearing hurdles for expediting project executions and fast-tracking approvals to kick-start the investment cycle. However, the on-ground pace of movement continues to remain slow impeded by variety of factors including sector specific constraints, demand dynamics, tight credit availability and high indebtedness of participants. Effectively, private sector interest and funds flow into the hands of contractors / executing agencies has been constrained. Page 2
In view of the near term pain points; we expect demand to remain suppressed for another couple of quarters before project execution gathers momentum driven by initiation of works under contracts awarded over the last 12 months. Developments in the coal mining sector provides some immediate respite, while execution in road projects remain slow. We believe funding tie up by railways is likely to drive spending in the sector over the next few quarters, while ports corporatization is expected to impact the industry dynamics positively. ICRA Channel check: Sense of restlessness as pace of revival stays below expectations Almost 70% of the dealers we interacted with have witnessed de-growth in sales volumes during the first four months of 2015 From our extensive interaction with the dealer community, we sense restlessness as the wait for demand revival continues. Almost 70% of the dealers we interacted with have witnessed de-growth in sales volumes during the first four months of 2015 and a majority of them are yet to witness any meaningful impact of the policy measures announced by the GoI. While the dealers continue to be hopeful of recovery driven by expected pick up in project execution, current low level of machine utilizations, large fleet of on-ground idle inventory and tightness in funding scenario are expected to be dampeners dragging the recovery timelines further. A significant proportion of the dealers we interacted with, have revised their growth expectations for 2015 downwards in line with the year-to-date performance. Nevertheless, they pin their expectations on improvement in pace of implementation post monsoons with volume revival to follow during H2 CY 2015 and H1 CY 2016. Product Segment score card All the product segments witnessed steep decline in CY 2014 underlining broad-based industry underperformance. ICRA expects low double digit growth in some of the product segments; however growth in other segments including the high volume segment of Backhoe Loaders is expected to be lower and back-ended. The expected growth rates for individual product category Backhoe Loaders: After consistent decline over the last four years, this product segment is expected to report thin growth in CY 2015. Excavators: Performance of the segment is expected to improve in the current year by around 10%. Wheeled Loaders: Reforms on the cards are expected to support performance of the user industries; however meaningful recovery in the product segment would be visible in CY 2016 only. The report also details ICRA s analysis on the market transition between Backhoe Loaders, Excavators and wheeled Loaders. Page 3
Mobile Cranes: One of the worst performing in the MCE industry, demand for cranes is expected to remain under pressure due to the supply glut. Some recovery is expected in the lower capacity segments towards the later part of the year. Dumpers: A low volume and diversified user product demand recovery for Dumpers is expected by 10-15% in the second half of CY 2015. Dozers: Characterized by low volumes, growth in the segment largely hinges on mining activity. Moderate pick-up is expected in the second half of CY 2015. CONSTRUCTION INDUSTRY: Order flow continues to be tepid GLOBAL MINING AND CONSTRUCTION EQUIPMENT INDUSTRY: Global demand to contract by 8-10% in 2015-16 Despite weak order book movement, traction in revenues witnessed during Q3, 2015-16 indicate some movement in project execution. Interest rate reductions and policy reforms are expected to hasten execution and reduce costs while the industry engages in asset monetisation and fund raising to shore up balance sheets. However, despite healthy orders in hand, increment to order book has been extremely slow at sub 3% over the past three years. Further, several of these incremental orders in 2014 came from exports, and not the domestic markets which could throw up demand for MCE. GLOBAL MINING AND CONSTRUCTION EQUIPMENT INDUSTRY: Global demand to contract by 8-10% in 2015-16 Weak commodity prices are expected to curtail capital expenditure by global resource majors such as Rio Tinto, Vale and BHP Billiton among others, well into the next year leading to fall in demand for Mining equipment globally over the next 12 months. Further, investment in construction activity would be contingent on local government policies and economic scenario across the globe. The report details commodity price trends and volume trends in MCE for various geographies globally (over the past 18 months) and geography wise demand expectations over the next year. The report also captures the results highlights of key global MCE majors--caterpillar Inc., Hitachi Construction Machinery Co. Limited and Komatsu Limited PRODUCT FEATURE - Road & Soil Compacting Equipments The feature details product types, selection parameters and performance criteria of Compacting equipments. Demand for Compacting equipments has reported a stagnant performance over the last three years, as against considerable decline in larger industry volumes. ICRA estimates demand growth of 8-10% for Compaction equipment during CY2015. Page 4
List of Figures and Tables Chart 1: Large project announced and stalled Chart 2: Issues yet to be resolved (sector wise breakup) Chart 3: Issues resolved (sector wise breakup) Chart 4: Trends in GDP growth Chart 5: Trends in GFCF Chart 6: Trends in IIP growth Chart 7: Domestic MCE industry growth trends Chart 8: MCE industry customer segmentation by volume Chart 9: Customer priorities for new purchase Chart 10: Asset book build up trends for MCE financiers (NBFCs) Chart 11: Delinquency data (90 days plus) for MCE financiers (NBFCs) Table 1: Status of Works on Dedicated Freight Corridors Table 2: Status of Award of Civil Contracts in DFCs Table 3: Status of Key Metro Projects in India Chart 12: Trend in capacities and PLFs of Thermal Power Plants Chart 13: Trend in domestic coal production and imports Table 4: Trend in Air Traffic Growth (Passenger and Freight) Chart 14: Trend in cargo volumes handled by Indian Ports Chart 15: Trend in pipeline infrastructure in India Table 5: Status of key pipeline projects in India Chart 16: Trend in road project awards and execution Chart 17: Comparison of per day execution in road projects Chart 18: Trend in annual volumes of Backhoe Loaders Table 6: Player-wise market share in Backhoes Table 7: New entrants in Backhoes Chart 19: Trend in annual volumes of Excavators Table 8: Player-wise market share in Excavators Chart 20: Trend in annual volumes of Wheeled Loaders Table 9: Player-wise market share in Wheeled Loaders Table 10: Product characteristics- Backhoe Loaders vs. Excavators and Wheeled Loaders Chart 21: Value share of product segments (Backhoes, Excavators and Wheeled Loaders) across geographies Chart 22: Trend in annual volumes of Mobile Cranes Page 5
Table 11: Player-wise market share in Mobile Cranes Chart 23: Trend in annual volumes of Dumpers Table 12: Player-wise market share in Dumpers Chart 24: Trend in annual volumes of Dozers Table 13: Player-wise market share in Dozers Table 14: Key financial indicators (Standalone Annual trend) of BEML Table 15: Key financial indicators (Standalone Annual trend) of Tata Hitachi Table 16: Key financial indicators (Consolidated Annual trend) of ACE Table 17: Key financial indicators (Standalone Annual trend) of JCB Table 18: Key financial indicators (Standalone Annual trend) of Caterpillar Chart 25: Annual industry revenues and profits in the MCE industry Chart 26: Capital structure and coverage (MCE industry) Chart 27: Quarterly revenue growth trend for construction companies Chart 28: Quarterly profits and interest coverage trend for construction companies Chart 29: Order book trend for construction companies Chart 30: Global demand for 7 major product categories in construction equipment Chart 31: Geography wise split of global demand for mining equipment Chart 32: Geography wise split of global demand for construction equipment Chart 33: Demand in Chinese markets set to contract sharply by over 20-25% during 2015-16 Chart 34: Demand in Japanese markets to contract in 2015-16 by 10-15% Chart 35: Demand growth in Europe to correct slightly during 2015-16 to 0-5% Chart 36: Demand in India and Thailand to recover in 2015-16 Chart 37: Demand in CIS countries to fall sharply during 2015-16 Chart 38: Demand to grow by a muted 0-5% in North America during 2015-16 Chart 39: Global price trends for commodities-metallurgical coal, thermal coal, Copper and Iron Ore Chart 40: Global demand trend for Hydraulic excavators (in units) PRODUCT FEATURE: ROAD AND SOIL COMPACTING EQUIPMENTS Chart 1: Share of Compacting Equipments in the MCE Industry (3 year average) Chart 2: Trend in Compacting Equipments volumes Chart 3: Market share in volume terms for compacting equipments Table 1: Operational profile of the key players Table 2: Status of NHAI projects to be awarded (Dec 31, 2014) Page 6
Chart 4: Potential for road compacting equipments ANNEXURE: ICRA s Ratings in Mining and construction equipment Industry Chart 1: ICRA s Ratings in Mining and construction equipment Industry ANNEXURE: ECONOMIC UPDATE Chart 1: New GDP series indicates sharper growth relative to earlier series, trend revealed by other indicators (growth of IIP, tax revenue, Bank credit) Chart 2: Composition of growth unfavourable in Q3FY15, with sharp expansion of Government expenditure, sluggish investment growth Chart 3: Manufacturing volumes record modest uptick in growth as measured by IIP; growth of electricity generation eases in Q4FY15 Chart 4: Core sector growth declines sharply; capital, consumer goods continue to display volatility Chart 5: CPI inflation at 5.2% in March 2015; projection of mild monsoon deficit, rise in fuel prices in May 2015 emerge as near term concerns Chart 6: RBI maintains status quo during policy review in April 2015; further easing in Repo rate expected to be limited to 50 bps in 2015 Chart 7: Union Budget for 2015-16 focuses on reviving investment; sets less ambitious deficit targets for FY16, FY17 as compared to earlier roadmap Chart 8: Slowing exports, spike in gold imports widened merchandise deficit in Q3FY15; lower commodity prices to lead to small current account surplus in Q4FY15 Page 7
Subscribe to the full report for the following and more Economic overview impacting demand Brief overview of the Indian MCE Industry - Trends and ICRA's demand estimates -Growth outlook -Nation wide dealer check feedback - Financing scenario and delinquencies Industry wise project updates and investments in infrastructure Product wise score card Financial performance of MCE Companies -Profile of key players in the domestic MCE industry Performance of Construction Companies and their order book flow trends Global MCE Industry - Performance and outlook -Geography wise equipment demand and outlook -Commodity price trends -Key takeaways from results of global MCE companies for 2014 and beyond Product feature-road and Soil Compacting Equipments Page 8
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