Owing to weak investment activity, the Indian construction sector has been through a very challenging time for the past two years,. Delay in regulatory and environmental clearances as well as judicial activism that has stalled raw material and energy availability has had an impact on the infrastructure industry. Understandably, these developments have taken a toll on the construction equipment industry. But things may be looking up for the industry.
Construction equipment manufacturers in mining and construction, electrical and automation, defence, power generator, industrial engines and water technologies are expected to benefit because of the Centre’s thrust on infrastructure.
Infra push
Over the next few years, India is pegged to grow over 7 per cent, for the next few years. With an allocation of ₹55,000 crore for the Ministry of Road Transport and Highways, and a total allocation of a whopping ₹97,000 crore to the road sector, which includes the rural programme, it is clear that the government is intent on pushing the development of infrastructure.
Apart from this, the allocation to Smart Cities, AMRUT, Swacch Bharat, Clean Ganga schemes (water and waste water management) is around ₹23,100 crore for FY17. In this, the development of 100 smart cities over the next five years is expected to drain nearly ₹50,000 crore of Centre’s resources.
The focus on developing national and inland waterways, which will cut the industry’s supply-chain cost, is also a key positive for the industry. The increased emphasis on the defence sector and ‘Make in India’ schemes are also expected to boost manufacturing sector in the long run.
Which ones to bet on
With infrastructure getting the much-needed push, which companies should you bet on? Here are some sound names in the construction equipment space that are well placed to ride the recovery in the sector when it happens.
~~ Larsen & Toubro (L&T) , the globally renowned conglomerate , has interests in multiple business verticals ranging from infrastructure to manufacturing to IT services. The company sells and offers product support for a complete array of mining and construction equipment, electrical and automation, defence and aerospace, piping, ship building and other technology services. The order book at the end of December 2015 stands at ₹2,56,500 crore, nearly 4.5 times FY 15 revenue of ₹56,791 crore.
~~ Bharat Earth Movers Limited (BEML) , a public sector undertaking, operates along three major business verticals — mining & construction, defence and rail & metro. The mining and construction business supplies bulldozers, excavators, dumpers, shovels, loaders and motor graders and with dedicated R&D centres, the company has the capacity to further its capabilities in the defence sector too.
~~ Cummins , a market leader in manufacturing engines and related technologies for mining and construction equipments, is well placed to benefit from the Centre’s thrust on infrastructure. It owns nearly 40 per cent of the domestic market for power generator and alternator (market size of $860 million) and industrial engine (market size of $871 million). The company’s good relationship with original equipment manufactures and strong R&D capabilities, coupled with the Centre’s interest in defence sector and ‘Make in India’ manufacturing push are expected to further consolidate and help in the growth of the company’s performance in the long run.
~~ VA Tech Wabag , the leader in water management technologies that is headquartered in Chennai—by virtue of having its own patented technologies and R&D centre, is well placed to garner a big pie of the engineering, procurement, construction (EPC) and operation and maintenance contracts (O&M) of the water, waste water and industrial water management projects. The company recorded the highest order intake ever (over ₹5000 crore—both domestic and international) for the fiscal year ending 2016.
~~ Siemens , a technology leader in providing smart solutions, partners with client in industries ranging from railways, urban infrastructure, ports, power generation, transmission and distribution. With its 11 R&D centres across India and anationwide sales and service network, it has expertise to create energy-efficient and sustainable buildings, intelligent transport and smart city infrastructure. This should put the company in good stead to catapult forward. Though the companies net sales is ₹10,283 crore for the year ending September 2015, a 1.6 per cent drop compared to the previous year, the company still trades at a high price to earning ratio of 34 times.
Challenges foreseen
The global economy is undergoing a period of depressed investment climate and stagnating trade growth. China’s efforts to shift to a consumption-led economy and the developed countries efforts to create new jobs are yet to yield results. A steep drop in the prices of commodities has put the developed and emerging economies alike on fragile footing. The stress on the banking sector, the third consecutive failure of the monsoon and a delay in the passage of the GST Bill remain an overhang for the Indian economy. These global and domestic factors can play spoil sport and stall investment activity.