The construction equipment sector is expected to witness a revenue growth deceleration to 4-6 per cent this fiscal, stated a report by CRISIL Ratings. This is because of a decline in road construction contracts that curbed sales volume. The deceleration is in comparison to 27 per cent growth last fiscal when sales volume peaked to around 1.35 lakh units on strong demand from roads, railways and mining.
Despite tepid sales, CRISIL said, revenue will grow this fiscal because of better realisations, with product prices likely to surge after the implementation of the construction equipment vehicles (CEV) Stage-V emission norms in the last quarter. Benign input prices will also keep operating margin stable at 10.0-10.5 per cent.
Despite some working capital build-up, the consequent healthy cash generation, moderate capital expenditure and well-managed balance sheets will support credit profiles.
CRISIL Ratings analysed 17 construction equipment companies that represent over 75 per cent of the industry volume, to reach these conclusions.
Construction equipment comprises earthmoving equipment (~70 per cent of total volume), material handling equipment (14 per cent), concrete equipment (11 per cent) and road construction and material processing equipment (5 per cent). A significant portion of the earthmoving equipment (55-60 per cent) is used for road construction, the report maintained.
Anuj Sethi, Senior Director, CRISIL Ratings Ltd, said, “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 per cent this fiscal, to ~8,000 km. Sluggish demand from the road segment, along with a 15-20 per cent increase in product prices, will affect sales of earthmoving and road construction equipment, resulting in flat volume in fiscal 2025.”
Further, working capital requirements will rise 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.
Naren Kartic K, Associate Director, CRISIL Ratings Ltd, said, “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 coverage are expected to remain comfortable, approximately 0.25 time and around13 times, respectively, in fiscal 2025, compared with 0.20 time and 15 times in the previous fiscal.
The key monitorable, per CRISIL, will be the pace of infrastructure project execution, implementation of CEV Stage-V emission norms and further regulations, and movements in steel prices.
From: financialexpress
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