The demand for earthmoving equipment depends heavily on infrastructure development. Currently, with the renewed focus on various infrastructure building activities in sectors such as roads and highways, airports and ports, irrigation, railways and urban infrastructure, the earthmoving equipment segment is expanding at a fast pace.
Almost all types of equipment are likely to witness growth, though the market will continue to be dominated by the six most popular products – backhoe loaders, crawler excavators, mobile cranes, mobile compressors, compaction equipment and wheeled loaders. Other factors such as a reduction in the goods and services tax (GST) on most of the equipment, rising demand for specialised equipment, as well as gradual pick-up of rental and leasing services will keep the equipment demand buoyant.
Infrastructure push
The infrastructure sector is gaining momentum after a protracted slowdown, with stalled projects being revived and new projects being announced in roads and highways, ports, airports, etc. The government’s new policy initiatives and budgetary support have also fuelled positive trends in the sector.
The pick-up in construction and manufacturing activity is reflected in economic growth, which stood at a seven-quarter high of 7.7 per cent in the January-March quarter of 2017-18. This growth reinforces the view that the current uptick in GDP is led by the government’s thrust on infrastructure development and construction activities. Moreover, public roads contracts awarded quadrupled in the January-March quarter.
Efforts by the government to restart stalled infrastructure projects by providing the necessary clearances, the launch of the hybrid annuity model, and the successful implementation of the asset monetisation programme (toll-operate-transfer model) are also beginning to show positive results. In addition, the recent cabinet clearance to develop 83,677 km of highways (including length under the Bharatmala project) worth Rs 6.92 trillion will bring cheer to the construction industry over the next few years.
In the airport sector, the Ministry of Civil Aviation has already given the nod for the construction of 18 new airports in the country. Work on some has already started while on others it is expected to start soon. Likewise, the affordable housing drive and a slew of initiatives for the development of the port sector have led to measurable growth across all allied businesses that support the construction sector. Further, green shoots in sectors such as irrigation and railways have also lent momentum to the expanding construction equipment industry.
Rental market
For the earthmoving equipment segment, the rental market is a significant demand driver. With several large projects coming up, the rental market should ideally move towards becoming an organised sector from the current retail and small-time hirers. There is scope for an equipment aggregator entering the market offering tailor-made, end-to-end rental and service solutions. Excavators will likely be a key product line in the rental business. The issue of stressed balance sheets of most construction companies has led to an asset-light balance sheet move by almost all of them. This has further given a boost to the hiring of equipment. However, with the erratic cash flow of construction companies, several attempts to expand the organised rental market have not been very successful till now.
Impact of GST
In November 2017, the government reduced GST on most construction equipment from 28 per cent to 18 per cent. The rate, however, continues to be 28 per cent for 15 per cent of the products. The revised tax slab, leading to lower prices, will provide a fillip to renting and leasing options. Earlier, leasing companies imposed excise duty, sales tax as well as service tax which resulted in the total rate being much higher. Now, leasing companies will charge only 18 per cent GST, thereby making leasing a viable proposition. While organised players in the rental market are expected to gain from this rate reduction, it remains to be seen how unorganised rental players respond to the new tax regime. The GST levy has helped in smoother interstate movement of construction equipment as well and contractors have begun to look at opportunities outside their home states.
Equipment-wise opportunities
The backhoe loader will remain the most popular type of equipment among plant hirers and small contractors on account of its versatility and mobility. However, it is expected to be increasingly replaced by more efficient and productive machines, such as crawler excavators and wheeled loaders, particularly in large infrastructure projects. Therefore, the future growth rate of the backhoe loader segment may slow down; then again, it may well see increasing applications in rural areas which will sustain its strong market presence. Initially, the price of mini-excavators was high as compared to backhoe loaders. Now, their price has come down to the level of the backhoe loader. This can make customers shift towards mini-excavators because of their speed as compared to the backhoe loader. However, this shift is likely to be very slow and should not make any substantial impact on the backhoe loader market.
The construction segment accounts for a large proportion of crawler excavators. The 20-tonne class of excavators is the mainstay of construction activity as it offers the best combination of price, machine size and overall productivity. This class constitutes over 50 per cent of the excavator market. There is a positive trend in the demand for mid-sized excavators with a clear user preference for better technology. The demand is for machines with higher productivity, lower fuel consumption and higher component life.
The wheel loader market in the country has been growing at a brisk pace over the past couple of years after touching a low in 2015-16. The most popular class in India is the 3-3.5 tonne wheel loader constituting over 75 per cent of the total requirement. With an increase in the size of contracts, there will be demand for 5 tonne wheel loaders in certain applications such as iron ore mining and bulk handling at ports. The wheel loader market is expected to grow at a healthy rate of 15 per cent over the medium term. The major demand drivers will be the road, railway, irrigation and mining sectors, and industrial handling activities.
The demand for motor graders is expected to be strong in the next couple of years owing to the pick-up in coal mining activity and the government’s road building programme. Smaller and lighter models of motor graders will find demand in rural development projects where they are needed for the construction of narrower roads.
The future of the crane industry is bright with opportunities coming from various verticals of the infrastructure sector. For instance, gantry cranes are required for precast segment yards and bridge construction. The shipbuilding sector also requires cranes for handling different loads in various processes like construction of huge liners and ships as well as small vessels. In the real estate sector, the deployment of tower cranes is on the rise with an increase in high-rise projects in metros as well as Tier II cities.
As per industry estimates, the heavy duty truck segment has witnessed a growth of 20 per cent in the past 15 months and is continuing to grow. This spurt could be attributed to a variety of reasons including stricter implementation of overloading norms by some states, segmental shifts taking place with the market moving from basic economy trucks to higher tonnage and high-value products (tractor, trailer and multi-axle trucks) for higher economy of operation and greater profitability, among others. Further, the implementation of emission norms, the scrappage policy, boost in construction activities and pent-up demand post-GST (pent-up demand is getting freed with fleet owners, who had deferred purchases till now, returning to the market) will sustain the growth momentum for medium and heavy commercial vehicles.
Conclusion
According to Off-Highway Research, in 2017, backhoe loaders and crawler excavators accounted for 43 per cent and 25 per cent of the total market respectively. Going forward, the two will continue to dominate the earthmoving equipment space in terms of demand. Overall, the future of the construction equipment industry is bright in terms of smart technologies that can bring in greater productivity and efficiency to the segment. Contractors are keen to complete and deliver projects on time to earn the incentives linked to timely project completion. Therefore, they require machinery with faster cycle times and superior technology. Various stakeholders in the construction equipment business are pinning their hopes on the host of opportunities offered by the expanding infrastructure space.
