Capital Goods - Construction Equipment Survey 10Mar14

Construction & Mining Equipment Survey #2

India Capital Goods

March 2014

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.

Sector Thematic INDIA INDUSTRIALS

10 March 2014

REPORT AUTHORS

Misal Singh (91-22) 6766 3466 [email protected]

Abhishek Raj (91-22) 6766 3485 [email protected]

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 on-the-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

India Capital Goods Construction & Mining Equipment Survey #2

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.

North 36%

South20%East

20%

West24%



10 March 2014 Page 2 of 9

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:

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

Source: Off-Highway Research Source: Off-Highway Research

Fig 3 - Key types of construction equipment Name Description Players Wheel Loaders Primarily used to load material into or onto another type of machinery Caterpillar, BEML, JCB, Komatsu

Crawler/Wheel Dozers Moves earth/rocks with blade attached on the machine’s front end Caterpillar, BEML, JCB, Komatsu

Dump Trucks Used for hauling construction materials and excavated earth and rocks Caterpillar, BEML, Komatsu

Transit Mixers Used for transporting concrete / mortar from concrete batching plant to the pouring site; used for mass concreting works Maxmech

Rollers Used for levelling of surfaces ACE, Caterpillar

Compactors Used for compaction of loose soil Caterpillar, JCB, Komatsu

Graders Used for levelling of surfaces Caterpillar, Komatsu, ACE

Source: Company, RCML Research

Backhoe Loaders

43%

Crawler Excavators

18%

Wheeled Loaders

6%

Mobile Cranes

18%

Crawler Dozers

1%

Compaction Equipment

7%

Others7%

Backhoe Loaders

52%

Crawler Excavators

23%

Wheeled Loaders

3%

Mobile Cranes

14%

Compaction Equipment

4%Others

4%

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




Fig 4 - Key types of mining equipment Name Description Players

Draglines 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

Heavy Engineering Corporation, Caterpillar

Shovels/Excavators Consists of an articulated arm, bucket and cab mounted on a pivot (a rotating platform) atop an undercarriage with tracks or wheels

Telcon (Hitachi), L&T Komatsu, BEML, JCB India, Caterpillar India, Volvo

Dozers/Dumpers Dozers push earth and rocks with a blade installed at the machine’s front end. Dumpers are vehicles designed for carrying bulk material

BEML, Caterpillar India, Udyog (Tatra), Voltas (Unit Rig)

Backhoe Loaders Have a shovel/bucket on the front and a small backhoe on the back JCB India, Caterpillar India, Telcon (John Deere), L&T Case, BEML, Volvo

Source: Company, RCML Research

Fig 5 - Key crane types Name Description Players

Tower Cranes Offer combination of lifting capacity in horizontal and vertical dimension, used in the construction of tall buildings ACE, Manitowoc

Pick & Move Cranes Designed to pick and move loads on public roads ACE, TIL, Escort

Crawler Cranes Crane mounted on set of tracks, used for transportation lifting in off-highway environment ACE, Manitowoc, Sany, Demag, Liebherr

Truck Mounted Cranes Crane mounted on truck enhances its mobility ACE, TIL

Source: RCML Research

Fig 6 - Backhoe loader Fig 7 - Crawler crane

Source: RCML Research Source: RCML Research




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


Fig 9 - Sectoral contribution of demand, North India


29%

22% 22%

27%

18%20%

22%

40%

0%

15%

30%

45%

Roads Mining Construction (residential,commercial real estate)

Other infrastructure

(%) Current Outlook

38%

6%

25%

31%

19% 19%

25%

38%

0%

15%

30%

45%



(%) Current Outlook

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

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




Fig 10 - Sectoral contribution of demand, South India


Fig 11 - Sectoral contribution of demand, East India


Fig 12 - Sectoral contribution of demand, West India


33%

22% 22% 22%22%

11%

22%

44%

0%

15%

30%

45%



(%) Current Outlook

22%

33%

11%

33%

11%

33%

11%

44%

0%

15%

30%

45%



(%) Current Outlook

18%

36%

27%

18%18% 18%

27%

36%

0%

10%

20%

30%

40%



(%) Current Outlook




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


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


42%56%

33% 33% 36%

31%

25%

33%44%

27%

20%19%

22%11%

27%

7% 0%11% 11% 9%

0%

25%

50%

75%

100%

India North South East West

(%) Decreased by 0-5% Flat Increased by 0-5% Increased by more than 5%

2% 0%11%

0% 0%

24% 25%

22%33%

18%

38%50%

22%

44%

27%

36%25%

44%

22%

55%

0%

25%

50%

75%

100%

India North South East West

(%) Decreased by 0-5% Flat Increased by 0-5% Increased by more than 5%

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

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




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


Fig 16 - Pricing expectations YoY, North India


Fig 17 - Pricing expectations YoY, South India


11%

53%

29%

7%2%

51%

31%

16%

0%

10%

20%

30%

40%

50%

60%

Decreased by 0-10% Flat Increased by 0-5% Increased by more than 5%

(%) Current Outlook

6%

75%

13%6%

0%

56%

31%

13%

0%

20%

40%

60%

80%


(%) Current Outlook

0%

44% 44%

11%11%

44%

33%

11%

0%

10%

20%

30%

40%

50%


(%) Current Outlook

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




Fig 18 - Pricing expectations YoY, East India


Fig 19 - Pricing expectations YoY, West India


22%

33% 33%

11%

0%

56%

33%

11%

0%

10%

20%

30%

40%

50%

60%


(%) Current Outlook

18%

45%

36%

0%0%

45%

27% 27%

0%

10%

20%

30%

40%

50%


(%) Current Outlook


RESEARCH DISCLAIMER

Important Disclosures This report was prepared, approved, published and distributed by a Religare Capital Markets (“RCM”) group company located outside of the United States (a “non-US Group Company”). This report is distributed in the U.S. by Enclave Capital LLC (“Enclave Capital”), a U.S. registered broker dealer, on behalf of RCM only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization. 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. Subject to any applicable laws and regulations at any given time, non-US Group Companies, their affiliates or companies or individuals connected with RCM (together, “Connected Companies”) may make investment decisions that are inconsistent with the recommendations or views expressed in this report and may have long or short positions in, may from time to time purchase or sell (as principal or agent) or have a material interest in any of the securities mentioned or related securities or may have or have had a business or financial relationship with, or may provide or have provided investment banking, capital markets and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. Any particular arrangements or relationships are disclosed below. As a result, recipients of this report should be aware that Connected Companies may have a conflict of interest that could affect the objectivity of this report. See “Special Disclosures” for certain additional disclosure statements, if applicable. This report is only for distribution to investment professionals and institutional investors. Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Analysts and strategists are paid in part by reference to the profitability of RCM which includes investment banking revenues. Stock Ratings are defined as follows Recommendation Interpretation (Recommendation structure changed with effect from March 1, 2009)

Recommendation Expected absolute returns (%) over 12 months Buy More than 15% Hold Between 15% and –5% Sell Less than –5%

Expected absolute returns are based on the share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation. Stock Ratings Distribution As of 1 March 2014, out of 236 rated stocks in the RCM coverage universe, 124 have BUY ratings (including 12 that have been investment banking clients in the last 12 months), 72 are rated HOLD and 40 are rated SELL. Research Conflict Management Policy RCM research has been published in accordance with our conflict management policy, which is available at http://www.religarecm.com/ Disclaimers This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject RCM to any registration or licensing requirement within such jurisdiction(s). This report is strictly confidential and is being furnished to you solely for your information. All material presented in this report, unless specifically indicated otherwise, is under copyright to RCM. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of RCM. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of RCM or its affiliates, unless specifically mentioned otherwise. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. RCM has not taken any steps to

ensure that the securities referred to in this report are suitable for any particular investor. RCM will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. Information and opinions presented in this report were obtained or derived from sources that RCM believes to be reliable, but RCM makes no representations or warranty, express or implied, as to their accuracy or completeness or correctness. RCM accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to RCM. This report is not to be relied upon in substitution for the exercise of independent judgment. RCM may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected absolute return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by RCM and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. This report is distributed in India by Religare Capital Markets Limited, which is a registered intermediary regulated by the Securities and Exchange Board of India. Where the report is distributed by 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. If this research is distributed in the European Union by RCM UK, it is directed only to non-retail clients. In Dubai, it is being distributed by Religare Capital Markets (Europe) Limited (Dubai Branch) which is licensed and regulated by the Dubai Financial Services Authority. In Singapore, it is being distributed (i) by Religare Capital Markets (Singapore) Pte. Limited (“RCMS”) (Co. Reg. No. 200902065N) which is a holder of a capital markets services licence and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as ““institutional investors” or “accredited investors” as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations (the “FAR”), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to RCMS when providing any financial advisory service to an accredited investor, or “overseas investor” (as defined in regulation 36 of the FAR). Persons in Singapore should contact RCMS in respect of any matters arising from, or in connection with this publication/communication. In Hong Kong, it is being distributed by Religare Capital Markets (Hong Kong) Limited (“RCM HK”), which is licensed and regulated by the Securities and Futures Commission, Hong Kong. In Australia, it is being distributed by RCMHK which is approved under ASIC Class Orders. In Sri Lanka, it is being distributed by Bartleet Mallory Stockbrokers, which is licensed under Securities and Exchange Commission of Sri Lanka. If you wish to enter into a transaction please contact the RCM entity in your home jurisdiction unless governing law provides otherwise. In jurisdictions where RCM is not registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation which may vary from one jurisdiction to another and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Religare Capital Markets does and seeks to do business with companies covered in our research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of research produced by Religare Capital Markets. Investors should consider our research as only a single factor in making their investment decision. Any reference to a third party research material or any other report contained in this report represents the respective research organization's estimates and views and does not represent the views of RCM and RCM, its officers, employees do not accept any liability or responsibility whatsoever with respect to its accuracy or correctness and RCM has included such reports or made reference to such reports in good faith. This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material on RCM’s own website, RCM takes no responsibility whatsoever for the contents therein. Such addresses or hyperlinks (including addresses or hyperlinks to RCM’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report or RCM’s website shall be at your own risk. Special Disclosures (if applicable) Not Applicable

http://www.religarecm.com/

Capital Goods - Construction Equipment Survey 10Mar14

Documents

Transcript of Capital Goods - Construction Equipment Survey 10Mar14