The construction equipment sector will see revenue growth decelerate to 4-6% this fiscal as a decline in road construction contracts curbs sales volume. That compares with 27% growth last fiscal when sales volume peaked to ~1.35 lakh units on strong demand from roads, railways and mining.

Despite tepid sales, revenue will grow this fiscal (see chart in annexure) because of better realisations, with product prices likely to surge after the implementation of the construction equipment vehicles (CEV) Stage-V¹ emission norms in the last quarter.

Benign input prices will also keep operating margin stable at 10.0-10.5%.

The consequent healthy cash generation, moderate capital expenditure (capex) and well-managed balance sheets — despite some working capital build-up — will support credit profiles.

A Crisil Ratings analysis of 17 construction equipment companies, representing over 75% of the industry volume, indicates as much.

Construction equipment comprises earthmoving equipment (~70% of total volume), material handling equipment (14%), concrete equipment (11%) and road construction and material processing equipment (5%). A significant portion of the earthmoving equipment (55-60%) is used for road construction.

Says Anuj Sethi, Senior Director, Crisil Ratings Ltd, “Infrastructure activities slowed down in the first quarter of this fiscal due to labour disruptions and delays in awarding of projects amid the general elections. The awarding of road projects is expected to drop 25% this fiscal, to ~8,000 km. Sluggish demand from the road segment, along with a 15-20% increase in product prices, will affect sale of earthmoving and road construction equipment, resulting in flat volume in fiscal 2025.”

Working capital requirements will increase as inventory is expected to rise temporarily given the need to maintain a wide range of spares and because of the build-up of stock (products made till December 31, 2024, may be sold for an additional six months in 2025 as per the existing regulations).

Says Naren Kartic.K, Associate Director, Crisil Ratings Ltd, “Capex will likely be limited to the last fiscal’s level, and will be mainly towards compliance with CEV Stage-V norms and debottlenecking. This, along with steady cash generation due to stable operating profitability, will buttress the impact of higher working capital debt, keeping credit profiles stable.”

For instance, gearing and interest coverage² are expected to remain comfortable, ~0.25 time and ~13 times, respectively, in fiscal 2025, compared with 0.20 time and 15 times in the previous fiscal.

The pace of infrastructure project execution, implementation of CEV Stage-V emission norms and further regulations, and movements in steel prices will bear watching in the road ahead.
 

¹ CEV Stage-V refers to implementation of emissions norms, noise limits and safety standards of components used in construction equipment vehicles effective January 1, 2025.
² Gearing = Total debt / Networth, that is, the total shareholder equity capital. Interest coverage = Earnings before interest, tax, depreciation and amortisation / Interest expenses