It is believed that the coronavirus outbreak’s impact on the infrastructure and construction segment is expected to be worse than that of the 2008 financial crisis-led economic slowdown. The imposition of Section 144 by state governments and suspension of public transport has already impacted manpower mobility and this may even further if the current lockdown proves ineffective. The construction equipment sector too is hugely impacted, The construction equipment industry, which was already going through a slowdown due to headwinds on several fronts before the COVID-19 outbreak, is likely to witness a further 15-20 percent decline in revenues in 2020, according to rating agency Icra.
According to a survey conducted in April with construction equipment dealers from 12 states such as Andhra Pradesh, Bihar, Jammu & Kashmir, Punjab, among others, the volumes are also expected to witness a 15-20 decline during the calendar year 2020, the rating agency said.
What propels this decline?
- While construction activity under execution was on, new project awarding activity slowed down in the 12 months pre-COVID also. The weak road project awards, especially in the past few quarters, severely reduced equipment demand prospects. The road sector has been the single biggest driver for construction equipment demand in the past three years and it is now in crisis. Currently, the rate of awards is far slower than execution, thereby resulting in a decline.
- The lockdown has resulted in various infrastructure project sites staring at closure as it is mainly due to an effect on the labor movement due to the lockdown and also due to supply chain disruptions that may contract further as more states enforce COVID-19 lockdown. The fiscal situation in the construction sector for both the Centre and states is already worsening and continued funding of infrastructure capital expenditure will be a challenge in the near future.
- The relief packages that are being rolled out by many states to support the loss of income caused by the lockdowns may further stress the government’s ability to spend on the infrastructure over the next one or two years, further dampening the construction equipment sector.
- The factors such as weakened state government finances, diversion of government support to healthcare at the cost of all other capital spends; new structural changes incorporating social distancing in several industries like construction; movement of labour; and the cost of restarting the economy, will likely have an impact on the construction equipment sector as well.
- Land acquisition delays, cost escalations and weak contractor liquidity affected and several other factors impacted the construction project too.
- The lockdown and disruption in utilization will affect cash flows of equipment users, leading to the weakening of the borrower profile.
According to ICRA,, the construction equipment industry contracted 16 per cent year-on-year in 2019, after three strong years of growth, as the domestic economy and construction industry witnessed a slowdown coupled with challenges like tight liquidity conditions, delayed payment to contractors and falling government spend on infrastructure.
The agency further noted that though the industry credit profile is likely to moderate, debt metrics will stay adequately comfortable despite decline in revenues.
“With the strong cash accrual build-up over the past few years, dependence on external debt by the industry has been limited. This trend is expected to continue despite the decline in accruals during FY2020 and FY2021,” it said.
ICRA expects around 200 bps increase in delinquencies in the coming quarters, which will curtail lender appetite.
Info source- PTI