Liquidity crunch hits MCE industry

Kolkata: Here’s yet another sector that is limping from the demand dearth. The domestic demand for mining and construction equipment (MCE) industry has  contracted sharply by 16-17 per cent year-to-date (YTD) in August 2019 yeay-on-year. This can be attributed to the tight liquidity conditions in the market, delayed payment to contractors and an overall slowdown in government spent on infrastructure activity.

“Overall, barring few select top-north pockets, demand has fallen significantly despite sizable discounting in the market. Our extensive channel check, pan India has revealed the depth of demand decline across states like Andhra Pradesh, Telangana, and NCR. Immediate-term demand outlook in the dealer community too is negative, although few expect a recovery in Q4 CY2019. Further, lack of liquidity on account of delayed payment by contractors coupled with slowdown in project execution is a cause of concern. Equipment utilisation in few markets is down almost 50 per cent. Consequently, delinquencies which were holding largely steady for the construction equipment asset class until Q1 FY2020 too are expected to have increased in the past two months,” said Pavethra Ponniah, Vice President and Sector Head, Icra.

Experts are of the view that while a revival in demand is expected during CY2020 to about 5-10 per cent, the October 2019 (post which production of BS III vehicles are not allowed) transition to the next emission norm is a potential headwind given the changes in the equipment and its substantial cost implications.

According to the latest Icra study, economic indicators also confirm this broad-based slowdown in capital expenditure with gross fixed capital formation (GFCF) growth having worsened considerably to 4 per cent in Q1 FY2020 from 13.3 per cent in Q1 FY 2019. The Centre’s capital expenditure, an important indicator too has grown by a muted 3 per cent during YTD Aug-2019.

“Demand slowed down from Q1 CY2019 in light of the general elections which took place in Q2 CY2019. Even after the elections, delays in flow of funds to the contractors have not improved leading to significant de-growth in sales volumes during YTD CY2019. Majority of the pan-India dealers are cautiously optimistic on demand picking up post-monsoon during the on-going festive season; but they expect overall CY2019 volumes to be significantly lower than CY2018 levels. However, most dealers expect CY2020 to be a healthy year in terms of volume growth. That said, awarding of new projects and flow of funds from government to contractors would be key to demand picking up during CY2020,” said Ponniah.