In FY2025, a 5-7 percent year-over-year decline in volumes is anticipated, with crucial new award activity needed to offset input cost pressures that are expected to impact margins.

According to preliminary data given by the Indian Construction Equipment Manufacturers Association (ICEMA), the Indian mining and construction equipment (MCE) industry’s volumes increased by 5percent year on year in the first quarter of FY2025. Although growth has been modest compared to the 20 percent YoY expansion in Q1 FY2024, the sector anticipates a decrease in domestic demand in H1 FY2025. This expectation was consistent with prior election cycles, driven by a slowdown in new project award activity (due to the Model Code of Conduct in effect for the Parliamentary Elections in April-June 2024) and a monsoon-related impact on construction operations in Q2 FY2025.

Nonetheless, the first-quarter result demonstrates customer confidence in the government’s continued focus on infrastructure development, which will have an impact on MCE demand.

Providing more insights, Ritu Goswami, Sector Head – Corporate Ratings, ICRA, says “While the road construction activity remained weak in Q1 FY2025, relatively strong activity in mining and real estate sectors provided some support to the overall volume growth. With renewed confidence regarding policy stability towards infrastructure-fuelled economic development, the new project award activities (and MCE volumes) are expected to ramp up faster than previously anticipated in H2 FY2025.”

Domestic sales increased by 5 percent year on year in Q1 FY2025, with the earthmoving and concreting equipment segments growing by 5 percent and 8 percent, respectively. The road (+1 percent YoY), material handling (+1 percent YoY), and material processing equipment (-2 percent YoY) divisions reported relatively flat volumes. Road construction accounts for 35-45 percent of MCE sales in India, followed by mining (20-30 percent), real estate (10-20 percent), and others. The trends appear to have been uneven across sectors in Q1 FY2025. MoRTH execution data shows a 14 percent YoY reduction in road execution in Q1 FY2025.

In contrast, mining of coal (+8 percent YoY production as per Coal India Limited), iron ore (+4 percent YoY in Apr-May), and limestone (+2.6 percent YoY in Apr-May) showed ongoing propulsion, indicating robust demand in user industries such as energy, steel, and cement. Strong residential real development demand boosted concrete equipment volumes, while YoY rise in port cargo traffic and rail freight is believed to have assisted demand for material handling equipment.

Going forward, the pace of awarding activity in the road sector has been slow over the last 15 months due to the pending Cabinet approval for the revised cost of the Bharatmala PariyojnaI plans; receipt of the same will be critical for increasing the pace of awards in the current fiscal year.

In other categories, a substantial allocation in Budget FY2024-25 for the Jal Jeevan Mission, the PM Gramme Sadak Yojana, and the PM Aawas Yojana – schemes that have been important drivers of new equipment demand – is promising. While an increase in state government capex could result in a speedier recovery in construction activity/MCE volumes, considering the severity of the monsoons in several states thus far, this will be more apparent after a few months.

“While ICRA expects the construction sector gross value added (GVA) to ease to 4-4.5 percent in Q1 FY2025 (Vs. 8.6 percent in Q1 FY2024), the same is estimated to expand by ~7.0-7.5 percent (Vs. 9.9 percent in FY2024) in FY2025, supporting the demand for MCE in the second half of the fiscal. An adequate order book of construction entities and their thrust on execution will support equipment utilisation levels. Some pre-buying due to the CEV-V emission norm transition in January 2025 should aid the volume offtake in H2 FY2025. Given the better-than-expected Q1 FY2025 performance, ICRA expects a relatively moderate 5-7 percent volume contraction in FY2025. The rental yields have softened in Q1 FY2025 compared to Q4 FY2024 levels and are expected to remain flattish on a YoY basis for the full fiscal. A material improvement in road sector awarding activity remains crucial and a key monitorable”, Goswami adds.

ICRA’s sample companies’ revenues and operating margins are predicted to moderate in FY2025 due to expected volume declines. Steel prices have been rising since early April 2024. In Q1, container freight charges nearly tripled due to ongoing difficulties in the Red Sea region. The domestic MCE business, which relies heavily on imports (about 45-50 percent by value), may be affected by the Red Sea crisis. This could lead to increased commodity and input prices, affecting OEM margins. Despite the slowdown, ICRA predicts that OEM credit profiles would remain steady in FY2025 due to low leverage and acceptable liquidity across major participants.