Even though the road sector in India continues to face multiple challenges, a strong pipeline of projects supports long term prospects. Around $180 billion investment is earmarked for the road sector, which is the highest ever investment for any Five Year Plan, and this should have a very positive impact on the construction equipment industry. The prime factor favouring the growth of the road equipment industry is the sheer scale of work still to be done in this sector. The increased size of projects and steady declining availability of manual labour will also favour the demand for mechanisation of work at construction sites. EQUIPMENT INDIA delves into the details. "The road construction equipment market will be driven largely by the plans of central and state governments under the ongoing 12th Five Year Plan (April 2012-March 2017). The central government has broadly planned for an investment of nearly $1.0 trillion on infrastructure development during the 12th Plan; of this, around $180 billion investment is planned for the road sector. This investment is the highest ever investment for any Five Year Plan and should have a very positive impact on the construction equipment industry. The prime factor favouring the growth of the road equipment industry is the sheer scale of work still to be done in this sector. The increased size of projects and steadily declining availability of manual labour will also favour the demand for mechanisation of work at construction sites," says Samir Bansal, General Manager, India, Off -highway Research. Says Rohit Inamdar, Senior Vice-President and Co-Head, Corporate Ratings, ICRA, "With the pipeline of road projects to be awarded by National Highways Authority of India (NHAI) and the state governments remaining strong, there will be ample growth opportunities for both developers and contractors over the next two-three years. As large investments are planned in this sector, the participation of private sector will be indispensable, and government is likely to facilitate policies to attract higher interest. Some of the policies have already been formulated, like creation of Infrastructure Debt Funds and the role played by India Infrastructure Finance Company (IIFCL), which will assume greater importance in channelising the much needed long-term debt funds into this sector. However, with multiple challenges confronting road developers, the industry is likely to witness consolidation, and stake sale in completed BOT projects are being actively pursued by many promoters While the initial traffic observed in many of these stretches is below the forecasted figure, the long concession period of 25 to 30 years provides headroom for improvement in cash flows due to potentially higher traffic growth." Rohit Punjabi, General Manager (Strategy Development), LiuGong India, "states: "There is a tremendous potential for the construction equipment industry, given the infrastructure deficit in the country. The Indian construction equipment industry is expected to grow at a compounded rate of 21 per cent. The emphasis on the quality and the subsequent introduction of several new road construction technologies too, is playing a key role in increasing demand for road construction machinery. Some of the key enablers to drive the construction equipment industry will be the role of government in speeding up the projects, financing of construction equipment and a key role played by the Public- Private Partnership." The key driversSays AM Muralidharan, President, Volvo Construction Equipment, "There are four key drivers which I believe are the modern trends in road construction. They are economic development, resource management, project management and modern technology. Economic development depends a lot on faster movement of goods to various regions across India; this is where roads play a key role. The road construction business which is key for road construction equipment manufacturers is looking bright, with the government planning widening of almost 36,000 km of national highways and construction of 5,000 km of expressways. I believe there will be a significant increase in spends by the government for the construction of rural roads, state level roads, expressways and national highways, considering that the government has planned to double its infrastructure investment in the 12th Five Year Plan. This phenomenal growth in infrastructure spending by the government will be further boosted by the increasing role of private funding for road construction. The efficient management of a project ensures timely delivery of the project done in a cost effective manner. Proper planning, monitoring of the equipment and managing manpower are some of the key drivers towards successful project management." "Another key trend I have observed is effective resource management. While companies use the latest models of compactors, motor graders, asphalt finishers and compaction equipment to ensure high quality of roads, I believe having trained manpower is equally critical. Soil stability is one of the key aspects before starting construction of roads," says Muralidharan. He further elaborates, "The road construction sector has witnessed increased mechanisation with growing use of equipment such as pavers and compactors. Some of the latest equipment gaining popularity are higher capacity paver finishers, compactors and bitumen pressure distributors. Besides the product features, product quality and after sales service for road construction equipment has increased considerably. Mechanisation is finally beginning to have a firm grip in the Indian roads sector and the time duration to finish projects is also reducing. But there has to be a constant upgrade of technologies along with introducing new technologies. Around the globe and specifically in India, Volvo CE is the leading solutions provider for buying dependable equipment that is backed by Volvo dealers with expert, local knowledge and the parts and service support that customers need. Our latest technologies include the wheel compactors with 3- tier engines and electronic controlled pavers which ensure smoothness and high quality of roads."The marketSpeaking on the demand-supply scenario especially for compactors and pavers, P Ramesh, CEO and Managing Director, Wirtgen India, had this to say, "The market for compactors has decreased by 5-8 per cent in 2012 and in the last five years, more players have entered the field. It is a matter of time before the market for compactors will again pick up. The demand in 2011 was around 250 for the sensor paver and around a hundred in the 9 m class and above. There was a drop of around 40 per cent in the demand in 2012." Ramesh further added, " New technologies like milling and cold recycling have been introduced to the Indian highways and city roads and more road contractors are showing interest in these environmentally friendly technologies. We have also undertaken some pilot projects within India, to promote these technologies." "The year 2011 has been a growth year for the industry however, due to the current economic slowdown; the demand for construction equipment for the road sector has been bit sluggish in 2012. The excavator segment has witnessed slight growth however; there has been a decline of about 4-5 per cent in the compactor segment. The main reason for this holdup is that even after being approved by Central government and achieving financial closure, many projects have not progressed. Whether it is land acquisition or environment, the on ground execution needs to be improved. Once these projects are taken on a fast-track implementation, the demand for road equipment will absolutely go up, says Amit Gossain, VP - Marketing & Business Development, JCB India. "The need of the hour is to do active monitoring and ensure proper and smooth implementation," he adds.Samir explains the sales situation: "Sales of asphalt finishers will possibly suffer a decline of five per cent and compaction equipment by four per cent in 2012, compared to the previous year; sales of compaction equipment is also likely to decline marginally. Sales of motor graders will suffer the highest decline of 48 per cent over the previous year and the combined sales of road construction machines including the motor graders would fall by over ten per cent in 2012."Challenges aheadThe road sector in India continues to face multiple challenges in the form of impediments in execution, financing constraints, optimistic traffic estimates and stressed financial position of the developers. Several projects have faced delays in execution mainly on account of delayed land acquisition, removal of encroachments, shifting of utilities, receipt of approvals and environment clearances, etc. In addition, the actual traffic in many operational toll road projects has turned out to be significantly lower than the traffic estimates. Consequently, lenders have increased caution while funding fresh projects, especially in those cases where the bidding is perceived to be very aggressive. In addition, the overall creditworthiness of road developers have deteriorated due to their leveraged balance sheet and strained profitability. Further, weak capital markets and stressed valuations have made raising equity capital extremely difficult for most developers. As a result, participation in the road projects offered by NHAI over the last few months has been muted. While subdued competition is positive for the sector which, not too long ago, witnessed irrational bidding, the sharp decline in the private sector participation across the board implies a reduced risk appetite from the developers and increasing difficulty in facing financial closures, according to an ICRA report. Over the last few years, NHAI has been awarding projects only under the Public-Private Partnership (PPP) mode, in comparison to item-rate contracts which were awarded earlier. The road contractors which were earlier engaged in executing projects on item rate or Engineering, Procurement and Construction (EPC) contract basis struggled to maintain their order-book and many opted to enter the PPP space by undertaking projects on build-operate-transfer (BOT) mode. Since BOT projects require long term fund infusion, and the capital markets have not been conducive for raising funds, several players had resorted to external borrowings to meet their equity commitments in various Special Purpose Vehicles (SPV) floated to develop the projects thus resulting in double leveraging and increase in overall indebtedness at the group level. Moreover, elongated working capital cycle in core construction businesses of many entities has also strained their liquidity position and further increased their dependence on borrowed funds. The operating margins of several road contractors also witnessed pressure because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin on many new projects.According to Rohit, "Many projects which were awarded over the last one-two years faced difficulty in achieving financial closure due to aggressive bidding, and uncertainty on land acquisition, approvals etc. The lenders have also become cautious on groups which have over leveraged themselves. Further, the execution on many of the projects remained slow primarily because of delays in land acquisition, clearances, and financial closure. Projects that had the requisite approvals and funding reported healthy execution. " In case of many toll-based road projects which commenced operations, the actual tolled traffic during the initial period was significantly lower than the initially estimated traffic. This coupled with higher interest burden had resulted in stress on debt servicing capability and project return indicators. However, projects with established traffic continued to perform well as the impact of higher interest burden was compensated by higher revenues in case of inflation-linked toll rates.Trends observedSpeaking on the trends in road equipment financing, Muralidharan had this to say: "The high cost of construction equipment makes access to financing a key enabler for the growth of consumer equipment industry. With nearly 80 per cent of all construction equipment sold in India being financed, financial intermediaries have played a key role in the growth of this sector. The financing industry is dominated by NBFCs leading in terms of market share. However, a key factor that could impact customers is that interest rates are becoming higher and companies are hesitant to take loans. They are waiting for interest rates to reduce. Volvo Financial Services, through its exclusive partnership with various finance companies, is enabling financial assistance for construction equipment. Such internal financial options are benefiting customers and seeing a positive trend in India."Muralidharan also pointed out the importance of rentals. He said, "Renting of construction equipment is another option available to the customer. Although the rent model is developed and well organised in global market, in India it is highly unorganised with the market accounting almost close to 30 per cent and a mere 5 per cent is organised rental market. The rental market offers advantages to customers and OEMs. For OEMs, the equipment rental helps even out demand volatility and promotes equipment trial. For customers, using rental equipment helps reduce capital investment and optimises maintenance and manpower overheads." Rohit sums up the situation thus, "As the pace of projects delivery and their execution picks up, the demand for road construction equipment will also grow. We are fully geared to cater to the emerging demand trend. To accelerate the development process in the rural area, the government has already formulated various schemes; for example, the Pradhan Mantri Gram Sadak Yojna, a scheme that aims at providing connectivity to all eligible unconnected habitations of more than 500 persons in the rural area. With increasing investment in the infrastructure sector, we foresee a huge demand for road construction equipment manufacturers in the coming years. Also, as the government plans to work on faster execution of the top priority projects, it will act as an enabler in keeping the momentum going."