Better operating leverage, modest capex to keep credit profiles stable this fiscal
Revenue for the domestic construction equipment sector is likely to grow 14-15% this fiscal on a high base of ~29% last fiscal. This will be driven by continued government focus on infrastructure build-out, especially roads, metros and railways, including projects under the National Infrastructure Pipeline (NIP). Construction activity across the real estate and mining sectors will also be supportive.
In volume terms, the sector should see all-time high sales of ~1.2 lakh units this fiscal, compared with ~1.1 lakh units last fiscal. Earthmoving equipment1 accounted for ~70% of sales volume last fiscal, material handling and concrete equipment ~22%, while material processing equipment comprised the rest.
Better operating leverage and moderation in raw material (steel) prices are expected to lead to 100-150 basis points improvement in the operating margin of construction equipment manufacturers to ~10.5-11% this fiscal.
The consequent improvement in cash accruals and moderate capital expenditure will help offset the impact of higher working capital borrowings and keep debt metrics healthy, leading to 'Stable' credit profiles.
An analysis of 17 construction equipment makers accounting for ~75% of the sector's revenue indicates as much.
Says Poonam Upadhyay, Director, CRISIL Ratings "Increased pace of road construction (accounting for ~40% of construction equipment demand), augurs well for the sector's growth. Manufacturers are also seeing healthy demand from the real estate and mining sectors, and from contractors of bridges, airports and metro corridors. In addition, some amount of pre-buying of equipment is also likely towards the last quarter of this fiscal, with the sector migrating to CEV Stage-V2 emission norms from April 1, 2024, which will increase equipment prices."
Says Naren Kartic K, Associate Director, CRISIL Ratings, "We expect capital spending by CRISIL-rated construction equipment makers to remain at last fiscal's level of ~Rs 1,300 crore, which will be largely funded from cash accruals. That said, we expect high working capital intensity to continue due to stiff competition among manufacturers, with longer credit period being offered to customers to gain market share."