Construction Equipment Revenue Growth Slows to 4-6% Due to Decline in Road Contracts

According to a recent report by CRISIL Ratings Ltd., the construction equipment sector is anticipated to experience a slowdown in revenue growth. The expected growth rate for the current fiscal year is 4-6%. This slowdown is attributed to a decline in road construction contracts, which has led to a reduction in sales volumes. In contrast, the sector saw a remarkable growth of 27% in the last fiscal year. Sales reached around 1.35 lakh units, driven by strong demand from roads, railways, and mining projects.

Despite the tepid sales, CRISIL anticipates revenue growth this fiscal year will be supported by improved returns. The report indicates that product prices are expected to increase after the implementation of the Construction Equipment Vehicles (CEV) Stage-V emission norms. This change is set to take place in the last quarter. Additionally, lower input costs are expected to help maintain operating margins at 10.0-10.5%.

The report emphasizes that there will be an increase in working capital. However, strong cash flow, moderate capital expenditure, and well-managed balance sheets are expected to maintain credit profiles throughout the sector.

CRISIL analyzed 17 construction equipment companies, which collectively account for over 75% of the industry's volume, to draw these conclusions. The construction equipment category comprises various segments, including:

• Earthmoving equipment (approximately 70% of total volume)
• Material handling equipment (14%)
• Concrete equipment (11%)
• Road construction and material processing equipment (5%).

Notably, a significant portion of earthmoving equipment (55-60%) is utilized in road construction.

The Official Statement

Anuj Sethi, Senior Director at CRISIL Ratings Ltd, commented, “Infrastructure activities slowed down in the first quarter of this fiscal year due to labor disruptions and delays in awarding projects amidst the general elections. The awarding of road projects is expected to drop 25% this fiscal year, to approximately 8,000 km. The sluggish demand from the road segment, combined with a 15-20% increase in product prices, will impact sales of earthmoving and road construction equipment, resulting in flat volumes in fiscal 2025.”

Additionally, the report suggests that working capital requirements are projected to increase. This rise is primarily due to an anticipated temporary increase in inventory levels. It is necessary to maintain a wide range of spare parts and to build up stock.

Naren Kartic K, Associate Director at CRISIL Ratings Ltd, added, “Capital expenditure will likely remain at last fiscal year’s levels, primarily focusing on compliance with CEV Stage-V norms and improving operational efficiencies. This, coupled with steady cash generation from stable operating profitability, will help mitigate the effects of increased working capital debt, ensuring credit profiles remain stable.”

For example, gearing and interest coverage ratios are expected to remain manageable in fiscal 2025. The projected ratios are around 0.25 times and approximately 13 times, respectively. In comparison, the ratios for the previous fiscal year were 0.20 times and 15 times.

CRISIL stresses that several key factors should be monitored.These factors include the speed of infrastructure project execution. They also encompass the rollout of CEV Stage-V emission norms and other regulations, along with fluctuations in steel prices.

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