The $9.5-billion Indian construction equipment (CE) sector is likely to record muted sales growth in FY25 as the Lok Sabha elections held in May this year led to a delay in award of infrastructure projects, including road construction.
Construction equipment sales comprises earthmoving (around 70 per cent), material handling (14 per cent), concrete (11 per cent), and road construction and material processing (5 per cent). Around 60 per cent of the earthmoving equipment sold is used in road construction.
Owing to the drop in sales, CRISIL Ratings Senior Director Anuj Sethi pegs revenue growth in FY25 to be the slowest across the FY17-25 period, barring FY20 and the partly Covid-impacted FY21.
Emission norm impact
“Revenues for CE makers are expected to grow by 4-6 per cent year-on-year in FY25, largely driven by higher realisation following migration to the CE vehicles stage-V (CEV5) emission norms, while sales volumes are expected to remain flattish to moderately negative,” Sethi says.
Moreover, a hike in product prices due to compliance with CEV5 emission norms will also impact sales, especially in Q4 FY25. The last quarter is otherwise usually strong on sales, Sethi adds.
Sounding a positive note, Shalabh Chaturvedi, Managing Director of CASE Construction Equipment (India and SAARC region), says, “During H1 FY25, the domestic CE industry’s sales increased in single-digit percentage, which is a far cry from the about 20 per cent increase in the last two years, but still encouraging despite the general elections and protracted monsoons.”
CASE India, however, foresees that the anticipated surge in demand in Q3 FY25 may be offset by a slowdown in the next quarter due to higher prices after the new emission standards kick in from January 1, 2025.
“Overall, we expect this year to remain in single-digit growth. FY26, however, looks robust with the market digesting the CEV5-related price increase, coupled with a surge in the execution of infrastructure projects that are in award phase currently,” Chaturvedi says.
Focus on innovation
Chaturvedi says the transition to CEV5 emission standards for wheeled equipment would significantly impact original equiment manufacturers (OEMs) and the industry at large, since it compels them to embrace more modern and innovative approaches to improve operator safety, lower ambient noise levels, and safekeep the environment.
The transition will also present short-term difficulties such as customers taking time to adjust to the higher pricing of the new features and technologies. However, the sector may see a spike in equipment demand in Q3 FY25 to avoid buying higher priced equipment later, Chaturvedi says.
“At CASE we are set to transition towards new emission and safety norms with the latest engine technological platform, which offers reduced cost of ownership while ensuring environmental sustainability,” he says.
CRISIL’s Sethi notes that the CEV5 emission norms will lead to 10-15 per cent price increase.
He, however, thinks the dip in sales would be transient. “Over the medium to long term, the implementation of CEV5 norms will uplift the revenues of CE makers, and volumes are expected to recover with the government’s continued focus on infra spending. Besides, mining activity is expected to gain momentum,” he adds.
The original timeline for the implementation of CEV5 norms was March 31.
“Hence, there was a lot of pre-buying in H2 FY24. The sales volumes in H2 FY25 will largely depend on the pace of infra projects execution. Moreover, while only CEV5 models can be produced from January 1, 2025, vehicles meeting earlier emission norms can be sold for a finite interval in calendar year 2025,” Sethi says.
Raw materials
Industry and analysts point to steel prices and freight costs as key factors in FY25.
Steel is the chief material for the manufacture of CEs. During FY25, raw material prices are expected to be stable. However, any increase in steel cost may impact profitability amid muted demand, with limited scope to pass on the price hike, Sethi says.
Besides, 30-35 per cent of critical or specialised components are still imported, so higher freight costs can affect profitability, he explains.
Chaturvedi points out that since steel is a vital component in making machinery such as loader backhoes and excavators, price changes will immediately impact the cost structure.
Similarly, freight expenses, both domestic and foreign, directly impact supply chain and logistics.
“Even though supply constraints have caused volatility, steel prices are expected to remain range-bound as a global slowdown is partially being offset by growth in India. Freight costs, however, remain concerning due to factors such as fluctuations in fuel prices and geopolitical uncertainty. For efficient management, we at CASE are keeping close tabs on the cost of raw materials,” he says.