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CRISIL Insights
RATINGS
Credit outlook for domestic construction equipment sector:
Healthy financial profile and demand mitigate impact of intensifying competition
Analytical contacts:
Anuj Sethi Pradeep K
Head - Corporate and Government Ratings Manager - Corporate and Government Ratings
Tel:+91-44-6656 3108, Email:ansethi@crisil.com Tel:+91-44-6656 3140, Email:pradeepk@crisil.com
Indian construction equipment industry will benefit from healthy demand, driven by infrastructure spending. The profitability of the domestic players will be susceptible to rising raw material costs and pricing pressure due to intense competition. However, healthy growth prospects, and strong financial risk profiles will mitigate the impact of pressure on profitability, helping CRISIL-rated construction equipment manufacturers sustain the credit quality over the medium term.
Healthy demand to drive growth in revenues
India's construction equipment industry has regained momentum since the second half of 2009-10 (refers to financial year, April 1 to March 31) following the recent economic slowdown, with off-take growing at a steady pace. The Eleventh Five Year Plan period (2007-12) entails an investment of about USD492 billion on infrastructure projects. This is likely to result in significant construction expenditure, driving growth in the industry. The demand has led to healthy revenue growth for the domestic construction equipment players (refer to Chart 1); CRISIL believes that the players will maintain the healthy revenue growth trends over the medium term.
Rising input costs, intensifying competition, and diminishing technological edge impact profitability
The profitability of construction equipment players is a function of volatility in their cost of inputs, mainly steel and aluminum, and their coverage for fixed costs and unfavourable movements in the value of foreign exchange (forex). While the operating margins of players recovered slightly in 2009-10 (refer to...