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Govt Spending Cuts Hit Construction Sector
The Economic Times  |  May 10, 2019

Ashutosh R Shyam & Ketan Thakkar Mumbai

REDUCED FLOW OF MONEY forces leading construction equipment companies to cut production by 15-60% for the next few months


The ongoing economic slowdown appears to be affecting the all-important construction sector too. In the past few months, construction equipment makers have cut production while awarding of new road contracts has stalled as the government curbed capital expenditure to meet the FY19 deficit target.


The central government has spent only Rs 2.73 lakh crore out of the estimated Rs 3.15 lakh crore capital expenditure target for the year ended March, data for the first 11 months of the year show.


According to the Controller General of Accounts (CGA), the government’s capital expenditure in the first 11 months of the previous fiscal year ped 8%, affecting to some extent the potential production or order book of key companies across sectors.


One of the key sectors to feel the impact of government’s falling capital expenditure is roads infrastructure. The awarding activity of National Highways Authority of India (NHAI) has slowed down. Against a target to award 7,500 km in FY19, NHAI has awarded only 2,222 km. It is estimated that execution of road projects is likely to miss the target by 35%. Not surprisingly, the reduced flow of money has impacted construction equipment companies. These companies estimate production cuts of 15-60%.


Leading construction equipment companies such as JCB and Tata Hitachi — that are primarily into manufacturing of backhoe loaders, excavators, crane and forklifts — have cut production by 15-60% for the next few months, vendors told ET.


JCB, the largest construction equipment company with more than 50% market share, has cut production to 1950 vehicles (mainly backhoe loaders and excavators) per month in May from a monthly run-rate of more than 3,000 vehicles per day in the previous fiscal year.


The total volume of construction equipment in India stood at 100,000-110,000 in 2018 and grew at 25-30% in the same period. A vendor for a construction equipment company said these companies had cut production on uncertainty regarding demand due to impending general elections and hazy demand outlook.


Sandeep Singh, MD at Tata Hitachi, said the company had undertaken a 5% correction in January-March and will correct its schedule by 10-15% for the April-June quarter. Singh says the NBFC crisis had impacted business in the first quarter of 2019 and some slowdown in construction equipment is usually seen ahead of elections. This time, he says, the slowdown appears more pronounced.


“In January-April, the market is already down by about 10%. The offtake is expected to remain weak in the coming few months before the new government takes charge. Traditionally, July and August are slower months due to monsoon. We expect the real offtake post September. It is not that the orders are not there, there is a lot of work, it is the availability of funds that is slowing down projects,” he added.


According to market leader JCB, payments to contractors are being held up and that is affecting demand. JCB says business was flat so far with a downward bias and it is calibrating its schedule based on supply and demand factors.


“While a blip such as this was partly expected due to the engagement with the election process, it would be imperative that the new government addresses the challenges around the infrastructure sector on priority,” Vipin Sondhi, MD of JCB, says. Infrastructure sector is a multiplier for employment. Though roads and highways led the growth over the past five years, it is important that railways, irrigation and urban rejuvenation provide the thrust in the future, he added.


The chief reason for production cut is the slower pace of awarding of new road projects. Hetal Gandhi, associate director at CRISIL Research said, “NHAI wanted to clear a huge awarding backlog from FY18, which entailed high land acquisition cost and quantum. Hence awarding activity in FY19 has been impacted.”


“Execution in FY19 was impacted as many HAM projects are still awaiting appointed dates on account of delays in land acquisition,” she added.


NHAI is likely to miss its target of awarding contracts for 7,500 km for the previous fiscal year. So far, it has been able to award only 2,222 km of contracts for FY19, according to data compiled from government websites. An emailed query to NHAI remain unanswered at the time of going to press.


The slowdown in government investment is also reflected in key high-frequency indicators. The sales of medium and heavy commercial vehicles (MHCV) fell in five out of past six months. MHCV volume growth in the second half of FY19 fell 4.45% compared with 61.99% growth in the first half. It must be noted that the tipper segment, which is used mainly in construction activity, has been driving growth for the MHCV segment in the previous fiscal. Similarly, the volume of lubes and grease, mainly used in industrial activity, fell 15% between the January and March period of FY19 compared with a growth of 16.4% in the first nine months of FY19. IIP grew just 0.1% in February 2019, the lowest reading in 20 months.