Slow road projects, Red Sea crisis could impact demand for road construction equipment

Road project awards by the Ministry of Road Transport and Highways (MoRTH) are slated to see a 40-43% on-year decline in FY24, and this has raised concerns for construction equipment companies such as Volvo CE India. 

Dimitrov Krishnan, Managing Director of Volvo CE India, said the decline could hamper project pipelines in the coming fiscal year. However, he remains optimistic that the government will address the issue moving forward. 

"One cause of concern is that the number of road contract awards has been lower this year. If you don't have a pipeline of projects, it can cause the demand to slow down," said Krishnan in an interaction with Autocar Professional on the sidelines of the Bharat Mobility show held in Delhi. "The government can, of course, help (pick up) the pace again," he added before continuing that the current road award projects have been good enough for about a year.

The cruciality of the new project award can be gauged from the fact that about 30–40% of demand for the construction equipment industry comes from the road construction segment, the top executive further added.

Rating agency ICRA had in December last year cut its forecast of road awards by the Ministry of Road Transport and Highways (MoRTH) in FY2024 to 7,000–7,500 km, a year-on-year decline of 40–43%. It further added that if the model code of conduct for the general elections comes into effect in Q4 FY2024, the awarding activity is likely to get further curtailed, as March itself typically accounts for 40–45% of awards in a year.

Nonetheless, ICRA highlighted that road execution has remained strong and is likely to increase by 16–21% on a YoY basis to 12,000–12,500 km in FY2024 amid a sizeable backlog owing to healthy awards in the last few years, an increased capital outlay by the Government of India, and a focus on the completion of projects ahead of the general election. 

High demand continues for the construction equipment industry

Krishnan highlighted that demand for construction equipment continues to soar, although a dip is expected in the first quarter (Q1 FY25) on account of general elections. According to him, after the new government settles down in a few months post-election, construction activities are likely to "bounce back" strongly in August and September. Considering the loss of one quarter due to elections, even in the worst-case scenario, industry growth may slow down by 5% of the previous year, which is still impressive considering the high base of previous years.

Another factor that is favouring the industry this time is that unlike the previous elections of 2019, there were certain outlier events such as the ILFS scam and Srei which disrupted the economy. In contrast, this time, the economy is firing on all cylinders, including a stable banking sector,  a strong stock market that is climbing, and the availability of money flow in the private sector. In addition to that, the rural markets are also looking impressive. 

For the sake of reference, IL&FS stands for Infrastructure Leasing & Financial Services Limited. The company that provided financial services and infrastructure development created a major economic crisis after many of the companies to which it lent loans defaulted. The development prompted IL&FS to default on its own repayments, causing mayhem and bringing the market to a standstill. There were allegations of mismanagement, fraud, and unethical practices within the company. The SREI scam, on the other hand, involved a Kolkata-based infrastructure company, which was charged with alleged financial irregularities and fraud. 

Geopolitical tensions causing logistical headwinds

According to Krishnan, even as the Ukraine war continues to remain a cause for worry, it has not had much of an impact. However, the situation in the Middle East due to the conflict in the Red Sea region has been forcing the ship lines to take a longer route, thereby increasing the lag by about 14–16 days for shipping from Europe and some other regions.  "But in my opinion, it can be recovered in one quarter'," Krishnan remarked before signing off.