Growth begets growth. As India's economic growth accelerates, it is lending impetus to the various key and allied sectors of the economy. A notable beneficiary has been the construction equipment (CE) industry, which soared to new heights in FY24 with an impressive 26 per cent surge. Remarkably, this high growth momentum is expected to continue in FY25 and beyond because of the robust pipeline of various infrastructure projects, both currently underway and the new ones slated to hit the ground in the second half of the current fiscal.
For the fiscal year ended March 31, 2024, the CE industry sales skyrocketed to 135,650 units, eclipsing the previous fiscal year's tally of 107,779 units. In fact, even during FY22, sales had grown a 24 per cent over the previous year.
According to the annual report by the Indian Construction Equipment Manufacturers Association (ICEMA), the CE industry's impressive growth in FY23 is largely attributed to the government's infra-led growth agenda and pre-election stimulus, catalysing projects across all major construction equipment segments. The sector's stellar performance is underscored by a surge in both domestic and export markets, with a 24 per cent and 49 per cent increase, respectively. Earthmoving equipment sales, constituting three-fourths of total CE sales, surged 21 per cent, while material handling and concrete equipment witnessed robust growth, showcasing the industry's robust momentum.
Says Deepak Shetty, CEO and MD, JCB India, a major player in the branded, organised construction equipment manufacturers: "The government's sustained focus on infrastructure development and increased budget allocation has been instrumental in this phase of growth." Shetty points to the recent projections by ICEMA, adding, "The next 3-5 years will be an exciting phase for the construction equipment industry. As per ICEMA reports, India is poised to become the number two market in the world for construction equipment by 2030. This will be against the backdrop of extensive investments in infrastructure development which are critical towards making India a manufacturing destination for the world."
Another industry player, Deepak Garg, MD, Sany India, says that the CE industry is likely to witness over $4.5 billion worth of investments in the next 5-7 years, as demand arising out of infrastructure projects touches a new high. "Looking ahead to 2030, our vision is to establish ourselves as a leading force in the Indian construction equipment market. To achieve this, we plan to strengthen our sales, expand our market reach, and augment our dealership network nationwide," Garg adds.
Outlook FY25 & Challenges
India Ratings and Research (Ind-Ra) has maintained a neutral outlook on the construction sector for FY25. "The neutral sector outlook is backed by an expectation of 10-12 per cent year-over-year (yoy) revenue growth in FY25. Order inflows are likely to pick up in 2H FY25, led by supportive government budgets along with expectation of acceleration of private sector's capex," says Krishan Binani, Director, Corporate Ratings, Ind-Ra.
Despite the continued focus on capex by the central government and likely rebound in state and private spending, Ind-Ra expects the engineering, procurement and construction (EPC) sector's pace of order execution to moderate in FY25, given the elections in 1QFY25. After the 30 per cent CAGR growth over FY20-FY24, the centre's own capex is projected to grow at 17 per cent in FY25, following the trend of lower spends in an election year. Acceleration in sector-specific private sector capex and continued growth in state spending are likely to partially offset the lower central spend. That being said, the revenue growth in the past two years has exceeded Ind-Ra's expectations, with the FY24 revenue growth likely to have been 17-18 per cent.
The on-ground growth in the overall construction business can be gauged from the growth of reputed construction and engineering players. Take, for example, Patel Engineering, the fastest-growing engineering company in the hydropower space. "As the company strategically bids for major projects, its order book, which stood at Rs 19,134 crore as of December 2023, is steadily expanding, expected to reach around Rs 25,000 crore by the end of FY25," Rupen Patel, Chairman and Managing Director, Patel Engineering told BW Businessworld recently.
Agree experts. The sub-sectors of civil construction, power (especially transmission & distribution), water and metro are likely to lead the revenue growth in FY25 in the overall construction sector, analysis by Ind-Ra stated. However, the growth in the roads and railways sector could be sluggish, it added. And the proof is just in from an analysis by credit ratings agency CareEdge. As per its latest report, from 34 km per day in FY24, the pace of national highway construction is expected to slow to 31 km per day in FY25. CareEdge Ratings expects the execution pace to decline by 7-10 per cent y-o-y - from 12,350 km in FY24 to about 11,500 km in FY25.
The Reserve Bank of India's new draft guidelines on project financing have raised concerns over struggling construction firms, particularly under-construction infrastructure projects. According to analysts, the proposed guidelines are a pre-emptive measure by the RBI to prevent large defaults on infrastructure loans, especially considering recent increases in infrastructure spending. However, some analysts and market participants have expressed concerns that these regulations could tighten funding for project finance, potentially hampering infrastructure and capital expenditure growth.
According to Rajashree Murkute, a senior director at CareEdge Ratings, the guidelines present challenges for both ongoing and operational infrastructure endeavours. The requirement of a mandatory tail-period accounting for 15 per cent of a project's economic life is highlighted as particularly impactful. This could hinder infrastructure projects' ability to secure additional top-up loans, potentially necessitating an 8-10 per cent increase in equity requirements for hybrid annuity model-based road projects. These adjustments aim to align loan tenure with 85 per cent of the project's economic life for concessions lasting 15 years.
Nuanced challenges aside, overall, the construction equipment manufacturers foresee continued high-growth trajectory in the coming year riding on the mega-infra projects all across India.
