Watch the macro factors, JCB chief tells industry
Public spending on infrastructure has been driving demand since 2016 but the spending might slow down in the run-up to the next year's general election, says Vipin Sondhi, managing director at the Indian arm of JCB, the British-headquartered multinational entity and biggest in the domestic construction equipment industry. The reduction in fuel excise duty is estimated to trim government revenue by ~105 billion in the second half of this financial year, which could hit the spending.
Public spending on infrastructure has been driving demand since 2016 but spending might slow down in the run-up to next year’s general election, says Vipin Sondhi, managing director at the Indian arm of JCB, the British-headquartered multinational entity and biggest in the domestic construction equipment industry.
The reduction in fuel excise duty is estimated to trim government revenue by ~105 billion in the second half of this financial year; it could hit the spending.
“We are going into an election year. We need to watch for the larger macro economic factors, including public spending and sustenance of spending, liquidity for funding infrastructure projects and funds available to NBFCs (nonbank finance corporations),” he said.
Sondhi was sounding a note of caution in the backdrop of high growth for his industry. It has seen volume growth of about 44 per cent in the first eight months of this calendar year. He said new uncertainties had come up. Beside the pace of public spending, the other thing to watch out is interest rates. “There will be a chain of events. But, if public spending continues till it can before elections, the industry’s growth momentum can continue till the first half of 2019. After that, we will have to wait for a direction from the next government and economic situation,” he added.
The construction equipment industry sold 61,246 units in the domestic market in the past calendar year, a record. This was a growth of 17 per cent over a year before. In the first eight months of the current year, sales have been 53,000 units and 2018 seems certain to be a record year, again.
Others in the industry include Tata Hitachi Construction Equipment, Escorts and Larsen & Toubro.
For JCB, this country is its single largest market. Roads and highways, along with irrigation, are the biggest driver for the sector; about threefourth of the orders are estimated to come from these two segments.
The pace of national highway construction has picked up in recent years —average daily construction was 17 km in financial year 2015-16, 23 km in FY17 and 27 km in FY18. The Union roads ministry has set an ambitious daily target of 45 km of national highway construction in the current financial year.
Sondhi said the other segments that drive demand for construction equipment vehicles — railways, urban rejuvenation and real estate — had not started contributing significantly.
“If at least three of these five in the infra sector fires at any point, you know the growth is sustainable,” he said. The government had managed to put together a sustainable business model for roads and highways. Vehicles are being used in a big way in desilting of village ponds by Telangana, Andhra Pradesh and Maharashtra, to improve water storage.
The pace of road construction is expected to pick up, now that the southwest monsoon has come to an end. “The October-March period is peak time for construction and this is also the peak sales period for the industry,” he noted.