Article by: Bhushan Mhapralkar

Subdued demand in the off-highway sector has led to an amount of restlessness. Expectations are that 2016 will be a year of growth on the back of an uptick in construction and mining activities.

Signs of gradual improvement is what the 2015 financial year has offered to the off-highway equipment sector. With a new government at the helm, some of the key developments that helped in the gradual improvement were a rise in business expectations, exports and recuperation of industrial production to a certain extent. Apart from steps like the industrial corridor development, an announcement to construct roads worth 8,500 km; build 16 new ports and waterways; airports in tier 1 and tier 2 cities through a PPP model, and broadening the financing base provided the necessary impetus. Impetus was also provided in the announcement during the last fiscal that the Japanese government will invest USD 35 billion in the country over the next five years to build smart cities and finance infrastructure projects. Japan would also provide financial, technical and operational support for the introduction of Bullet trains in India.

To boost infrastructure growth, which will in turn drive growth into the off-highway equipment sector, the government at the centre is known to be working towards easing the task of funding, expediting the approval process, de-bottling the system and simplifying the bureaucratic complexities. An uptick in the mining activity should provide immediate respite. It is no secret that last year was not the best year for off-highway equipment. Growth was modest. Demand for off-highway equipment (mining and construction equipment) contracted by over 15 per cent to 47,000 units from 72,100 units three years ago, in 2012. While the volume decline was felt across all product segments during the 2014 calendar year, segments such as backhoe loaders and heavy mobile cranes were some of the worst impacted. Wheel loaders, in comparison, fared a tad better. Road compaction equipment suffered a sharp slowdown in implementation of road projects during the election period in the first half of FY15. A moderate growth was recorded thereafter.

According to ICRA analysts, the off-highway equipment sector did not witness traction in demand during the first half of 2015 calendar year. Like 2014, the first half of this year too has been lack lustre, and mainly due to projects being stalled or shelved, or simply abandoned. There have been other sector specific issues too, including product viability due to promoter cash flow constraints. A report released by ICRA mentions that demand in the Indian off-highway equipment sector will pick up towards the end of the current fiscal (FY16). Growth will be in the region of six to seven per cent, followed by a sharper pick up of 20 to 25 per cent in FY17. According to ICRA sources, 2016 looks promising. It looks like a year that will bring good growth to most of the product segments as a result of the ongoing policy measures leading to absorption of surplus inventory in the market. Industry sources claim that the scale up in demand for the off-highway sector are often non-linear and is a reflection of assured job orders and cash flows that trigger strong buying. Developments in the coal mining sector is expected to provide some respite on an immediate basis. Pick up in road projects continues to be slow even though the government is known to be taking steps towards removing the road blocks. What is looking interesting is the pace of development that will touch the railways. Projects to lay new lines and modernise the existing network will drive growth into the off-highway sector claim sources. Even corporatisation of ports and the starting of work on building waterways.

While growth is being pursued, some interesting trends in the near past could prove useful. In the span of last six months, absolute demand for backhoes suffered significantly more than the demand for excavators. Equipment utilisation was found to be abysmally low at 50 to 60 per cent. Wide disparity in demand across several states was also observed apart from the return of few large contractors in niche pockets. Ironically, the efforts put in by the government at the centre to extend easier funding did not seem to turn real. This was attributed to the rising delinquencies, making equipment financing a potential constraint for the market. A ray of hope continues, and an example is the environmental clearance granted for Mumbai’s coastal road project by the environment ministry at the centre. In the pipeline for the last five years, this project, expected to be based on the PPP model, is valued at Rs. 8,500 crore and will span over 35 km from Nariman Point to Kandivali.

Among equipment, it is the volume-driven backhoe loaders that are expected to record a slight growth in the 2015 calendar year. The backhoe market has been declining for the last four years. Excavator are expected to record a 10 per cent growth during the current calendar year. According to ICRA analysts, reforms on the cards are expected to support performance of the user industries. Meaningful recovery however is expected only in the next calendar year. Also worth considering at this point in time is the transition between backhoes, excavators and wheel loaders. One of the worst performers in the off-highway equipment industry, cranes are expected to witness a dull period ahead, due to supply glut. Some recovery, claim ICRA analysts, is expected in the lower capacity segments towards the later part of the year. A low volume and diversified user product demand recovery for dumpers is expected to be in the range of 10 to 15 per cent in the second half of the calendar year 2015. Characterised by low volumes, growth in the dozer segment largely hinges on an uptick in mining activities. Moderate pick-up is expected in the second half of the 2015 calendar year.

A sense of restlessness prevails. Demand revival continues to evade most stakeholders in the off-highway equipment sector. Dealers have witnessed a de-growth in sales volumes during the first four months of this year claim ICRA analysts. A good deal of them are yet to feel the impact of the policy measures announced by the government at the centre. Hope remains, and that projects will gain speed against the current scenario where machine utilisation levels are low. A deficient monsoon could spoil the party as off-highway equipment manufacturers as well as those that make tractors continue to focus upon the rural markets of the country. Growth there has been dull, and resulted in the tractor industry facing one of its worst performing years. Domestic tractor sales volume growth declined by 8.3 per cent during the first nine months of FY15 in response to unfavorable, underlying short term drivers. In the first half of last fiscal, the tractor segment exhibited mixed trends, and posted a sharp decline of 21.8 per cent in the third quarter of the 2015 fiscal year over the corresponding period last year. Conditions among the domestic farm community have been depressed. Some of the key reasons being non-seasonal rains that led to crop damage and lower crop prices to farmers. Non-agri pull for tractors has been dull too. Mainly on account of the dullness that has been prevailing in the infrastructure sector.

Clearly discounts have been at play to keep the sales momentum going. If this is worthy of a comparison with the way sales are driven in the truck and bus segment by offering discounts, the export market for tractors recorded fair growth in FY15. It grew by 19.7 per cent in the 9 months (three quarters) of FY15 in comparison to the growth in the corresponding period during the
last fiscal.

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