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India Capital Goods

March 2014

Construction & Mining Equipment Survey #2

Sector Thematic
INDIA
INDUSTRIALS
10 March 2014

India Capital Goods


Construction & Mining Equipment Survey #2
In our India Construction & Mining Equipment (CME) Survey, we seek out demand, volume and pricing trends to gauge on-the-ground activity in the capital goods sector and the broader economy.

Key findings from our latest survey of 45 CME dealers and crane rental players are: (1) CME volumes are expected to contract in Q4FY14, with 70%+ of respondents reporting flat/declining sales YoY due to tepid demand, even as pricing is down upto 10% YoY; (2) road and infrastructure projects form a bulk of CME demand while mining and real estate offtake is subdued; and (3) soft utilisation levels of ~50% at crane rental companies indicate lower activity in the construction sector. While the business environment is sombre, dealer expectations of a volume/pricing recovery over the next six months point to a more encouraging medium-term outlook. Volumes lacklustre on lower demand; pricing remains under pressure: CME volume trends are expected to remain subdued in Q4FY14 with ~73% of our survey respondents reporting flat to lower sales YoY. Volume contraction in North/West India is particularly visible with 56%/36% of respondents reporting a decline. Given the weak offtake, pricing in the sector remains frail. Despite higher input costs and the adverse impact of a depreciating INR, 64% of respondents reported flat to lower pricing YoY in Q4FY14. Further, 11% have seen a price decline of upto 10% YoY in the form of various discount schemes. Demand largely from roads/infra sectors, mining/construction subdued: While overall CME demand remains weak, the roads/infrastructure sectors are lending some support with 29%/27% of respondents indicating end-user demand from these two sectors. However, offtake from the mining and construction (residential, commercial real estate) verticals remains muted. In particular, the lack of EC/FC has dented project execution, hitting CME demand. Lower crane utilisation points to muted construction activity: Cranes, which primarily cater to the process industry, renewable energy and real estate verticals, recorded lower utilisation of ~50% in Q4FY14, indicating lower activity levels in the construction sector. Given the weak asset utilisation, pricing in the crane rental sector is down 10-15% YoY. Higher cost of capital hurting equipment financing: Of the four major purchasers of CME equipment rental companies, contractors, institutional users and large developers equipment rental companies and contractors rely mostly on external financing. While capital availability is still adequate, the higher cost of borrowing (16-18% currently) is affecting equipment financing. Outlook: Though the current business environment for the sector is bleak, the outlook over the medium-to-longer term is encouraging. Industry participants expect a volume/pricing recovery over the next six months and a longer-term revenue CAGR of 20-25% (over the next seven years) led by higher urbanisation and government impetus on large infrastructure projects.
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. Where the report is distributed by Religare Capital Markets (UK) Limited (RCM UK), the firm is an Appointed Representative of Elevation Trading Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

REPORT AUTHORS

Misal Singh
(91-22) 6766 3466 misal.singh@religare.com

Abhishek Raj
(91-22) 6766 3485 abhishek.raj@religare.com

The Down to Earth Series The CME Survey forms part of our ongoing Down to Earth series which comprises a range of primary surveys, road trips and onthe-ground channel checks by our Equity Research team in India. CME survey statistics
Survey objective

To gauge the current demand environment, competitive landscape and future growth outlook for construction and mining equipment in India.
Number of respondents

45
Survey methodology

Dealer interactions Sample set characteristics


Region-wise break up
West 24% North 36%

East 20%

South 20%

India Capital Goods


Construction & Mining Equipment Survey #2
Backhoe loaders dominate the construction equipment market
The construction equipment industry in India is estimated at ~US$ 3bn. In terms of volumes, this translates to ~55k pieces of equipment p.a. Within this, backhoe loaders/ crawler excavators contribute the largest share of 52%/23% of total sales. The CME industry is broadly divided into four segments:

Sector Thematic INDIA


INDUSTRIALS

Within CME, backhoe loaders/crawler excavators contribute 52%/23% of total sales

Earth moving equipment such as backhoe loaders, excavators, wheeled loaders and dumpers, which are primarily deployed in mining and construction activities Material handling equipment storage and bulk material handling equipment including cranes Concrete equipment such as concrete mixers, concrete pumps, asphalt pavers, and Road building equipment such as excavators, diggers, loaders, scrapers and bulldozers.

India is expected to become the fourth largest marketplace for construction equipment, only behind China, North America and Europe. Given the scope for massive infrastructure spending in the country, industry participants expect to grow at 20-25% CAGR over the next seven years led by higher urbanisation and impetus on large infrastructure projects. Most international majors such as Case, Caterpillar, Hitachi, JCB, John Deere, Komatsu, Lieberr, Poclain, Sany, Terex and Volvo have a presence in India. Komatsu, John Deere and Hitachi operate in JV with L&T, Ashok Leyland and Tata Motors respectively. BEML is the leading domestic company in the sector, while JCB India is the most dominant player in backhoe loader equipment with ~50% market share.
Fig 1 - India CME sales breakup, FY06 Fig 2 - India CME sales breakup, FY12

Crawler Compaction Others 7% Dozers Equipment 7% 1% Mobile Cranes 18% Wheeled Loaders 6%

Backhoe Loaders 43%

Mobile Cranes 14% Wheeled Loaders 3%

Compaction Equipment Others 4% 4%

Backhoe Loaders 52% Crawler Excavators 23%

Crawler Excavators 18%

Source: Off-Highway Research

Source: Off-Highway Research

Fig 3 - Key types of construction equipment


Name Wheel Loaders Crawler/Wheel Dozers Dump Trucks Transit Mixers Rollers Compactors Graders Description Primarily used to load material into or onto another type of machinery Moves earth/rocks with blade attached on the machines front end Players Caterpillar, BEML, JCB, Komatsu Caterpillar, BEML, JCB, Komatsu

Used for hauling construction materials and excavated earth and rocks Caterpillar, BEML, Komatsu Used for transporting concrete / mortar from concrete batching plant to Maxmech the pouring site; used for mass concreting works Used for levelling of surfaces Used for compaction of loose soil Used for levelling of surfaces ACE, Caterpillar Caterpillar, JCB, Komatsu Caterpillar, Komatsu, ACE

Source: Company, RCML Research

10 March 2014

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India Capital Goods


Construction & Mining Equipment Survey #2
Fig 4 - Key types of mining equipment
Name Draglines Description Used in many surface mining operations to remove dirt in order to expose minerals underneath. Offers the minimum material removal cost per tonne and an average operating life of 40 years Consists of an articulated arm, bucket and cab mounted on a pivot (a rotating platform) atop an undercarriage with tracks or wheels Dozers push earth and rocks with a blade installed at the machines front end. Dumpers are vehicles designed for carrying bulk material Players

Sector Thematic INDIA


INDUSTRIALS

Heavy Engineering Corporation, Caterpillar

Shovels/Excavators

Telcon (Hitachi), L&T Komatsu, BEML, JCB India, Caterpillar India, Volvo BEML, Caterpillar India, Udyog (Tatra), Voltas (Unit Rig) JCB India, Caterpillar India, Telcon (John Deere), L&T Case, BEML, Volvo

Dozers/Dumpers

Backhoe Loaders

Have a shovel/bucket on the front and a small backhoe on the back

Source: Company, RCML Research

Fig 5 - Key crane types


Name Tower Cranes Pick & Move Cranes Crawler Cranes Description Offer combination of lifting capacity in horizontal and vertical dimension, used in the construction of tall buildings Designed to pick and move loads on public roads Crane mounted on set of tracks, used for transportation lifting in offhighway environment Players ACE, Manitowoc ACE, TIL, Escort ACE, Manitowoc, Sany, Demag, Liebherr ACE, TIL

Truck Mounted Cranes Crane mounted on truck enhances its mobility


Source: RCML Research

Fig 6 - Backhoe loader

Fig 7 - Crawler crane

Source: RCML Research

Source: RCML Research

10 March 2014

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India Capital Goods


Construction & Mining Equipment Survey #2
Demand muted; roads/infra projects offer some relief
While overall CME demand remains weak, the roads and infrastructure sectors are lending some support 29% of our survey respondents reported underlying demand for CME arising from the roads sector, including 38%/33% of respondents in North/South India. Demand from mining and construction has been hard hit by the continued mining ban, land & forest clearance issues and a sluggish market in residential/commercial real estate. Going forward (next 1-2 quarters) however, demand from the roads sector is expected to come off, while the broader infrastructure sector is expected to pick up. Most respondents agree that underlying demand potential from infrastructure is high, but the sector has taken a beating because of policy uncertainly and a lack of decision making. With the elections due next quarter, participants are optimistic about a stable and conducive business environment.
Fig 8 - Sectoral contribution of demand, India
(%) 45% 40% Current Outlook

Sector Thematic INDIA


INDUSTRIALS

Roads/infrastructure projects are key demand drivers in the current quarter; 29%/27% of respondents indicated end user demand from these two sectors

30%

29% 27% 22% 20% 18% 22% 22%

15%

0% Roads Mining Construction (residential, commercial real estate) Other infrastructure

However, in the next 1-2 quarters demand from the roads sector is expected to come off, while the broader infra sector picks up

Source: RCML Research

Fig 9 - Sectoral contribution of demand, North India


(%) 45% 38% 31% 30% 25% 19% 15% 6% 19% 25% 38% Current Outlook

0% Roads Mining Construction (residential, commercial real estate) Other infrastructure

Source: RCML Research

10 March 2014

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India Capital Goods


Construction & Mining Equipment Survey #2
Fig 10 - Sectoral contribution of demand, South India
(%) 45% Current Outlook 44%

Sector Thematic INDIA


INDUSTRIALS

33% 30% 22% 22% 22% 22% 22%

15%

11%

0% Roads Mining Construction (residential, commercial real estate) Other infrastructure

Source: RCML Research

Fig 11 - Sectoral contribution of demand, East India


(%) 45% Current Outlook 44%

33% 30% 22%

33%

33%

15%

11%

11%

11%

0% Roads Mining Construction (residential, commercial real estate) Other infrastructure

Source: RCML Research

Fig 12 - Sectoral contribution of demand, West India


(%) 40% 36% Current Outlook 36%

30%

27%

27%

20%

18%

18%

18%

18%

10%

0% Roads Mining Construction (residential, commercial real estate) Other infrastructure

Source: RCML Research

10 March 2014

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India Capital Goods


Construction & Mining Equipment Survey #2
Volume growth remains subdued
CME volume trends are expected to remain subdued in Q4FY14 with ~73% of our survey respondents reporting flat to lower sales YoY. Volume contraction in North/West India is particularly visible where 56%/36% of respondents reported a decline. Overall, 20% of respondents reported a volume uptick of only 0-5% YoY in Q4, whereas just 7% of those surveyed saw volume growth of >5%.
Fig 13 - Volume growth YoY, current quarter
(%) 100% Decreased by 0-5% 7% 20% 75% 25% 31% 50% 33% 44% 27% 22% Flat 0% 19% 11% 11% 11% 27% Increased by 0-5% Increased by more than 5% 9%

Sector Thematic INDIA


INDUSTRIALS

~73% of survey respondents reported flat or declining sales YoY, implying muted volumes in Q4

25%

56% 42% 33% 33% 36%

0% India North South East West

Source: RCML Research

While offtake in the current quarter is uninspiring, most respondents are optimistic about prospects in the next six months. About 73% expect volumes to pick up in the next six months supported by traction in the infrastructure space. Given that the sector has underperformed for quite a few quarters, respondents believe that there is pent-up demand. Further, the next few months (before the monsoons) are seasonally strong for on-the-ground project execution.
Fig 14 - Volume growth expectations YoY, next 1-2 quarters
(%) 100% Decreased by 0-5% Flat Increased by 0-5% Increased by more than 5%

Respondents are optimistic about prospects in the next six months when ~73% expect a pickup in volumes

25% 36% 75% 44%

22% 55% 44%

50%

38%

50% 22% 27%

25% 24% 0% 2% India 25%

22% 33% 11% 0% North South 0% East 18% 0% West

Source: RCML Research

10 March 2014

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India Capital Goods


Construction & Mining Equipment Survey #2
Pricing power weak
Given the poor offtake, pricing power in the sector remains frail. Competition in the sector remains intense, limiting the scope of passing along price hikes. Despite higher input costs and a depreciating INR, 64% of respondents reported flat to lower pricing YoY. Only 7% of respondents saw price hikes of >5% YoY.
Fig 15 - Pricing expectations YoY, India
(%) 60% 53% 50% 40% 30% 20% 11% 10% 2% 0% Decreased by 0-10% Source: RCML Research Flat Increased by 0-5% Increased by more than 5% 7% 29% 31% 51% Current Outlook

Sector Thematic INDIA


INDUSTRIALS

64% of respondents reported flat to lower pricing vs. last year

16%

Fig 16 - Pricing expectations YoY, North India


(%) 80% 75% Current Outlook

60%

56%

40% 31%

20% 6% 0% 0% Decreased by 0-10% Source: RCML Research Flat

13% 6%

13%

Increased by 0-5%

Increased by more than 5%

Fig 17 - Pricing expectations YoY, South India


(%) 50% 44% 40% 33% 30% 44% 44% Current Outlook

20% 11% 10% 0% 0% Decreased by 0-10% Source: RCML Research Flat Increased by 0-5% Increased by more than 5% 11% 11%

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India Capital Goods


Construction & Mining Equipment Survey #2

Sector Thematic INDIA


INDUSTRIALS

Fig 18 - Pricing expectations YoY, East India


(%) 60% 50% 40% 33% 30% 22% 20% 11% 10% 0% 0% Decreased by 0-10% Source: RCML Research Flat Increased by 0-5% Increased by more than 5% 11% 33% 33% Current 56% Outlook

Fig 19 - Pricing expectations YoY, West India


(%) 50% 45% Current 45% Outlook

40%

36%

30%

27%

27%

20%

18%

10% 0% 0% Decreased by 0-10% Source: RCML Research Flat Increased by 0-5% Increased by more than 5% 0%

10 March 2014

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