Construction Equipment
Content
Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010
Construction Equipment
The Indian Construction Equipment industry has been on a high growth trajectory for more than a decade, led by buoyancy in sectors such as real estate and infrastructure. The industry has witnessed continuous modernisation and adoption of new technologies in recent years. With Construction Equipment (CE) industry volumes of around 40,000‐ 45,000 units per annum and an estimated turnover of US$2.6‐3.1 billion, the Indian market is relatively small as compared to the global market that is estimated at over $75 billion. The Indian construction equipment industry was severely hit by the economic slowdown, weak sentiments across user industries and tight liquidity conditions in 2008‐09, resulting in a sharp 15‐30% drop in demand across product segments. The cumulative negative impact across industrial/ infrastructure investments resulted in a sharp decline in Indian CE volumes in Q3, 2008‐09. Indian MCE volumes started picking up in November 2009 and maintained a healthy growth over the past four months. The IIP index April‐ February 2010 posted a growth of 10.1% as against 3.0% in the corresponding period of the previous year. IIP index‐Growth trends
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Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010 Market Overview The construction equipment market can be classified into four segments ―earth‐moving equipment, material‐handling equipment and cranes, concrete equipment and road‐building equipment. Until the1960s, the domestic requirement of mining and construction equipment was met primarily through imports. The large‐scale domestic production of construction equipment began only in1964 with the establishment of Bharat Earthmovers Ltd (BEML), a public sector unit of the Ministry of Defence, in Kolar, South India. Close to 200 manufacturers cater to the Indian construction equipment market. Public limited companies, including public sector units (PSUs), constitute 71 per cent of the sector, while private limited companies or joint ventures, including closely held private limited companies, constitute 29 percent. A handful of large players dominate the market, accounting for more than 90 per cent of the industry’s revenues. The unorganised sector contributes only about 10 per cent in value terms, although most players belong to this segment. Demand Generator
7% 2% 10%
Earth‐moving equipment Material‐handling and cranes Concrete equipment Road‐building equipment Others
13% 68%
During 2010, the production of cranes as well as lifts and escalators is expected to rise by 20.3 per cent and 11.9 per cent, respectively. In 2010, equipment sales are expected to grow by 26 per cent over the previous year. Currently, the equipment market is largely import driven, with India importing construction machinery worth US$ 181 million in 2009, up by 55 per cent over 2008. www.ghallabhansali.com 2
Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010
Construction Equipment industry Product Range Earthmoving Equipment Concrete Equipment Material Handling Equipment Telescopic Handlers Crawler Cranes Mobile Cranes Truck Cranes Forklifts Pick & Carry Cranes Material Preparation Road Construction Construction Vehicles Tunneling and Drilling Rotary / DTH Drilling Hammer Track Drill
Backhoe Loaders Excavators
Concrete Breaker Paver Finisher Concrete Batching Plants Concrete Pumps Concrete Mixers Hot Mix Plants Slew Cranes Tower Cranes Conveyors
Crushing Plants Jaw Crushers
Construction Equip Vibratory Rollers Boring Equipment
Dumpers Articulated Haulers
Loaders
Pavers
Bulldozers Skid‐steer Loaders Wheeled Loading Shovels Wheel Loaders Motor Graders Motor Scrappers Dump Trucks Wheel Dozers Draglines
Demolition Equipment
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21st July, 2010 The Indian CE industry could grow to US$ 13 billion in size by 2015 The industry has the potential to expand five‐fold, from revenues of US$ 2.3 billion in 2007 to US$ 12 billion to US$ 13 billion by 2015, based on four sources of demand growth. While growth up to US$ 8 billion by 2015 is achievable through normal industry evolution, new sets of proactive initiatives are needed to achieve the full potential of US$ 12 to US$ 13 billion. Base case domestic market potential. Domestic market spending on earthmoving and construction equipment is likely to be a cumulative US$ 40 billion between 2007 and 2015. This implies annual growth of about 17 per cent a year for the next eight years and would create an annual domestic market of US$ 8 billion in 2015. Key sectors driving demand are likely to be roads (US$ 8 billion cumulative demand), irrigation (US$ 8 billion cumulative demand), urban and residential construction (US$ 5 billion cumulative demand), and mining (US$ 5 billion cumulative demand). While the timing of this demand may be a bit uncertain, as it depends on the actual pace of infrastructure spending certainty about this level of demand is high. Additional domestic market potential. The above domestic market potential does not take into account the additional annual demand of US$ 2 billion (by 2015) that can be achieved if the industry catalyses this demand in three ways: (1) introducing new products and applications to help new customer segments use mechanized products (e.g., low‐ cost multi‐use equipment, demolition attachments, primary rock breakers); (2) catalyzing new services to increase equipment sales (e.g., rentals, leasing) to capture latent demand and (3) shaping regulation to support product demand creation by laying down product standards (e.g. road quality norms) and equipment replacement norms (e.g., permissible equipment usage). Domestic after‐sales revenue potential. Revenue from after‐sales services can be increased from the current 2 per cent of sales to the global average of 8 per cent through a series of initiatives aimed at improving the pricing and execution of annual and full maintenance contracts (e.g., reducing response time, enhancing support for smaller breakdowns). The annual potential is US$ 0.5 billion by 2015. While these services contribute only modestly to revenues, they provide an important counter‐cyclical source of revenue and can boost spare part sales. Export market potential. Additionally, the India‐based CE industry could capture US$ 2 billion to US$ 3 billion through exports in three areas: www.ghallabhansali.com 4
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21st July, 2010 o Components and aggregates. India‐based suppliers could capture 5 per cent of the total market and an even higher share of engineering‐ intensive, basic material‐based parts. This could be a US$ 1 billion opportunity. o E&D services. India has a strong initial advantage here and should aspire to capture about 25 to 30 per cent of demand (a potential of US$ 1 billion). o Equipment exports. India‐based manufacturers should aspire to capture 5 per cent of the market based on their competitive advantage and by mirroring the success achieved by Indian manufactures in exports of automotive products (an opportunity of approximately US$ 0.5 billion). Advantage India The Union Budget 2010–11 has allocated US$ 36.16 billion to the infrastructure sector, reflecting the Government of India (GoI)’s strong focus on the development of India’s infrastructure. India produces more than 0.4 million engineers every year. Moreover, India’s cost of skilled labour is the lowest in the world, with an entry‐ level engineer available at an average cost of about US$ 8,000 per annum.
Government expenditure on infrastructure is likely to result in increased construction expenditure of nearly US$ 253. 94 billion (INR 12,189 billion) between 2008–09 and 2012–13).
India is the fifth‐largest producer of crude steel in the world (2008), with a production volume of 54.5 million tonnes.
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21st July, 2010 Investments The GoI’s thrust on infrastructure development has provided considerable impetus to the construction equipment industry. The industry has witnessed a steady flow of investments since the third quarter of 2006. Investment in the industry at the end of the December 2009 stood at more than US$ 616.04 million (INR 29.57 billion), spread across 22 projects. Some of the projects set to be commissioned in 2010 are: o Liugong India has invested US$ 72.9 million (INR 3500 million) in Phase II of its earth‐moving equipment manufacturing facility in Madhya Pradesh, which is scheduled for completion by September 2010. o Tractors India Ltd (TIL) is investing US$ 52.08 million (INR 2500 million) in infrastructure equipment projects in West Bengal. These are scheduled for completion by May 2010. o WirtgenIndiaʹs US$ 6.25 million (INR 300 million) compactors project in Maharashtra is expected to be complete by September 2010. o AutometersAllianceʹs lifts and elevators manufacturing facility in Uttar Pradesh is scheduled to be operational by March 2010. o TILʹs road construction and coal handling machinery project in West Bengal is expected to be complete by July 2010. Policy and regulatory framework The GoI has permitted 100 per cent FDI in construction and development projects to attract more investment. Some of the key specifications are US$ 2 million limit on lump sum payments under the automatic route. Royalty to be levied as 5 per cent on domestic sales and 8 per cent on exports, net of taxes. The depreciation on general plant and machinery is proposed at about 15 per cent. Specific initiatives by the GoI that positively impact the engineering sector are Tariff protection on capital goods has been removed. Various initiatives are focused on infrastructure development and construction. The GoI has also introduced initiatives to increase power generation and improve the quality of power supply. o Custom duties on various equipment have been reduced. www.ghallabhansali.com 6
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21st July, 2010 Globally, the growth in the industry has been led by emerging economies; the economic crisis in 2009, however, put a brake: USA is the largest mining and construction equipment market in the world followed by China (around 0.3 million units) and Europe (around 0.2 million units). The global CE industry has been on an upswing since 2003‐04 and has grown by over 15% annually until Q3, 2008‐09. The growth was more pronounced in and was mainly driven by the fast growing BRIC nations of China and India. The global CE industry experienced a contraction in Q3 2008‐09 as a result of reduced construction activity, especially in the real estate segment; slowdown in mining activity and a virtual standstill in equipment financing in the aftermath of the economic meltdown towards the end of Q2, 2008‐09. The fall in demand was led by sharp declines in the key markets of Europe, Japan and North America. Barring certain markets like China, the global CE industry continued to fall in the first nine months of 2009‐10 as well, although the magnitude of global decline slowed down to around 4% in Q3, 2009‐10. The mining industry on the other hand has shown stronger signs of recovery in Q3, 2009‐10, as commodity prices started inching upwards. In addition to China, where there has been a full scale recovery of demand supported by fiscal stimulus and advancement in large‐scale infrastructure development, markets like Australia, Brazil, India, Indonesia and. Among the developed countries, the Japanese market witnessed full usage of rental equipment in Q3, 2009‐10. New MNC entrants setting up base in India: Many international original equipment manufacturers (OEMs) have indicated plans of setting up manufacturing facilities in India owing to its good growth prospects and slack demand in the traditional developed markets. Some of the new entrants in the past 3‐4 years were Japan’s excavator major Kobelco and ME company Komatsu; CE and farming equipment major, John Deere (USA) in JV with Ashok Leyland Limited; excavator & CE company Sany & Liugong (China) and MCE majors Hyundai and Doosan (Korea). Further, existing participants like Caterpillar and excavator manufacturer Telco construction Equipment Company Limited (Telcon) are either adding to their domestic capacities or increasing their product portfolio. With the incremental capacities and new entrants, the industry is expected to become more competitive and fragmented. However, growing mechanisation and large infrastructural projects proposed in the country indicate the potential to absorb these new capacities. The entry of global CE manufacturers has also facilitated product upgrades in the growing Indian market. www.ghallabhansali.com 7
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21st July, 2010 Used and rental equipment markets are still in their nascent stages: While there is good potential for used equipment in India, the market size of which is estimated at about three times the primary market, India does not have an established common platform for trading in used equipment. Again, the current rental penetration in India at around 7‐8% remains low as compared to the global standards of 50‐80%. An average of 30% of the equipments sold in Europe and over 60% in the United Kingdom are to rental operators. A robust rental market enables reduction in investments in projects by outsourcing the equipment requirement (including spares and services) and improving capacity utilisation of equipment. The key equipment in the rental fleet in India currently are backhoe loaders, pick‐and‐carry (PNC) cranes, excavators, motor graders and vibratory compactors. With the large infrastructure investment proposed over the next few years, demand for rental equipment is expected to see a large growth over the medium term. Globally, a number of OEMs like Caterpillar Inc, JC Bamford, UK and Volvo are actively involved in the equipment rental business, an area that has not caught on in India as yet. Conclusion: Over the past four months, the industry has been on an upturn supported by increased financing availability; step‐up in infrastructural investments and pick‐up in demand for commodities globally. Large proposed investment over the next several years in infrastructure (ports, airports, roads) has the potential to sustain the growing demand for CE. The Eleventh Plan commission (2007‐12) envisages the need for an infrastructure investment of over US$ 155 billion for development of roads, bridges, railways, ports and airports and over US$ 2 billion in mining. Capacity expansion in the steel, cement, oil refining and power sectors to meet growing infrastructure investments in India, is also expected to generate demand for construction equipment. The equipment rental business is another opportunity driver, with the industry expected to double in size to 16 per cent by 2015. The export opportunity is expected to grow on the back of rising cost pressures on developed countries and due to the emergence of low‐cost competitive suppliers and original equipment manufacturers (OEMs) in India. The CE industry has a critical role to play in making India one of the world’s top five economies by 2025. Construction equipment players have a unique opportunity to help realise the potential of this sector and, in doing so, garner their share of the US$ 12 billion to US$ 13 billion revenue potential. www.ghallabhansali.com 8
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21st July, 2010 Key players
Company Bharat Earth Movers Ltd (BEML) Revenue (in US$ million) Focus industry segments Products Crawler dozers, wheel dozers, excavators, dump trucks, loaders, backhoe loaders, pipe layers, walking draglines, rope shovelsand sprinklers Excavators, compactors and tele‐handling equipment, skid steers, wheeled and backhoe loaders, telescopic handlers, engines and vibratory single‐drum compactors Crushing, screening and milling equipment, pressure vessels, material‐handling equipment, steel plant equipment, process equipment such as flotation cell and thickeners
638
Mining, construction, defence, rail, metro
JCB India Ltd
299
Construction, housing, quarrying, agriculture
Mcnally Bharat Engineering Co Ltd
256
Power, steel, aluminium, material‐handling, coal washing, port cranes, civic, industrial water supply Power transmission, material‐handling equipment Power and steel plants, ports, fertilisers, mining Infrastructure construction, heavy engineering, industrial projects, power projects, ports and shipyards, dams, roads, coal mines, steel
Elecon Engineering Co Ltd TRF Ltd
217
Elevators, conveyors and moving machines, gears and crushers Stacker reclaimers, level luffing cranes, wagon trippers with side arm charger, rotary breakersandring granulators
159
Action Construction Equipment Ltd
100
Hydraulic mobile cranes, mobile tower cranes, fixed tower cranes, back hoe and wheeled loaders, lorry loaders, forklift trucks, crawler cranes, piling rigs, vibratory rollers and tractors
Gujarat Apollo Industries Ltd Eimco Elecon (India) Ltd L&T Komatsu Ltd
56
Road construction and maintenance
Asphalt plants, paver finishers, wet mix plants, bitument sprayers, kerb pavers, compaction equipment, crushing and screening machines, road‐marking machines and allied equipment Side dump loaders, load haul dumpers, and blast hole and water well drilling rigs Hydraulic excavators, components and hydraulic systems
32 25
Mining Construction
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21st July, 2010 Mahesh Babaria [email protected] Mittal Chheda [email protected] Disclaimer:‐
This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited (Ghalla Bhansali). This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed 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, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansali reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Information Sources: Capitaline ET IBEF Indian Earthmoving & Construction Industry Association Ltd www.ghallabhansali.com 10
21st July, 2010
Construction Equipment
The Indian Construction Equipment industry has been on a high growth trajectory for more than a decade, led by buoyancy in sectors such as real estate and infrastructure. The industry has witnessed continuous modernisation and adoption of new technologies in recent years. With Construction Equipment (CE) industry volumes of around 40,000‐ 45,000 units per annum and an estimated turnover of US$2.6‐3.1 billion, the Indian market is relatively small as compared to the global market that is estimated at over $75 billion. The Indian construction equipment industry was severely hit by the economic slowdown, weak sentiments across user industries and tight liquidity conditions in 2008‐09, resulting in a sharp 15‐30% drop in demand across product segments. The cumulative negative impact across industrial/ infrastructure investments resulted in a sharp decline in Indian CE volumes in Q3, 2008‐09. Indian MCE volumes started picking up in November 2009 and maintained a healthy growth over the past four months. The IIP index April‐ February 2010 posted a growth of 10.1% as against 3.0% in the corresponding period of the previous year. IIP index‐Growth trends
www.ghallabhansali.com
1
Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010 Market Overview The construction equipment market can be classified into four segments ―earth‐moving equipment, material‐handling equipment and cranes, concrete equipment and road‐building equipment. Until the1960s, the domestic requirement of mining and construction equipment was met primarily through imports. The large‐scale domestic production of construction equipment began only in1964 with the establishment of Bharat Earthmovers Ltd (BEML), a public sector unit of the Ministry of Defence, in Kolar, South India. Close to 200 manufacturers cater to the Indian construction equipment market. Public limited companies, including public sector units (PSUs), constitute 71 per cent of the sector, while private limited companies or joint ventures, including closely held private limited companies, constitute 29 percent. A handful of large players dominate the market, accounting for more than 90 per cent of the industry’s revenues. The unorganised sector contributes only about 10 per cent in value terms, although most players belong to this segment. Demand Generator
7% 2% 10%
Earth‐moving equipment Material‐handling and cranes Concrete equipment Road‐building equipment Others
13% 68%
During 2010, the production of cranes as well as lifts and escalators is expected to rise by 20.3 per cent and 11.9 per cent, respectively. In 2010, equipment sales are expected to grow by 26 per cent over the previous year. Currently, the equipment market is largely import driven, with India importing construction machinery worth US$ 181 million in 2009, up by 55 per cent over 2008. www.ghallabhansali.com 2
Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010
Construction Equipment industry Product Range Earthmoving Equipment Concrete Equipment Material Handling Equipment Telescopic Handlers Crawler Cranes Mobile Cranes Truck Cranes Forklifts Pick & Carry Cranes Material Preparation Road Construction Construction Vehicles Tunneling and Drilling Rotary / DTH Drilling Hammer Track Drill
Backhoe Loaders Excavators
Concrete Breaker Paver Finisher Concrete Batching Plants Concrete Pumps Concrete Mixers Hot Mix Plants Slew Cranes Tower Cranes Conveyors
Crushing Plants Jaw Crushers
Construction Equip Vibratory Rollers Boring Equipment
Dumpers Articulated Haulers
Loaders
Pavers
Bulldozers Skid‐steer Loaders Wheeled Loading Shovels Wheel Loaders Motor Graders Motor Scrappers Dump Trucks Wheel Dozers Draglines
Demolition Equipment
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3
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21st July, 2010 The Indian CE industry could grow to US$ 13 billion in size by 2015 The industry has the potential to expand five‐fold, from revenues of US$ 2.3 billion in 2007 to US$ 12 billion to US$ 13 billion by 2015, based on four sources of demand growth. While growth up to US$ 8 billion by 2015 is achievable through normal industry evolution, new sets of proactive initiatives are needed to achieve the full potential of US$ 12 to US$ 13 billion. Base case domestic market potential. Domestic market spending on earthmoving and construction equipment is likely to be a cumulative US$ 40 billion between 2007 and 2015. This implies annual growth of about 17 per cent a year for the next eight years and would create an annual domestic market of US$ 8 billion in 2015. Key sectors driving demand are likely to be roads (US$ 8 billion cumulative demand), irrigation (US$ 8 billion cumulative demand), urban and residential construction (US$ 5 billion cumulative demand), and mining (US$ 5 billion cumulative demand). While the timing of this demand may be a bit uncertain, as it depends on the actual pace of infrastructure spending certainty about this level of demand is high. Additional domestic market potential. The above domestic market potential does not take into account the additional annual demand of US$ 2 billion (by 2015) that can be achieved if the industry catalyses this demand in three ways: (1) introducing new products and applications to help new customer segments use mechanized products (e.g., low‐ cost multi‐use equipment, demolition attachments, primary rock breakers); (2) catalyzing new services to increase equipment sales (e.g., rentals, leasing) to capture latent demand and (3) shaping regulation to support product demand creation by laying down product standards (e.g. road quality norms) and equipment replacement norms (e.g., permissible equipment usage). Domestic after‐sales revenue potential. Revenue from after‐sales services can be increased from the current 2 per cent of sales to the global average of 8 per cent through a series of initiatives aimed at improving the pricing and execution of annual and full maintenance contracts (e.g., reducing response time, enhancing support for smaller breakdowns). The annual potential is US$ 0.5 billion by 2015. While these services contribute only modestly to revenues, they provide an important counter‐cyclical source of revenue and can boost spare part sales. Export market potential. Additionally, the India‐based CE industry could capture US$ 2 billion to US$ 3 billion through exports in three areas: www.ghallabhansali.com 4
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21st July, 2010 o Components and aggregates. India‐based suppliers could capture 5 per cent of the total market and an even higher share of engineering‐ intensive, basic material‐based parts. This could be a US$ 1 billion opportunity. o E&D services. India has a strong initial advantage here and should aspire to capture about 25 to 30 per cent of demand (a potential of US$ 1 billion). o Equipment exports. India‐based manufacturers should aspire to capture 5 per cent of the market based on their competitive advantage and by mirroring the success achieved by Indian manufactures in exports of automotive products (an opportunity of approximately US$ 0.5 billion). Advantage India The Union Budget 2010–11 has allocated US$ 36.16 billion to the infrastructure sector, reflecting the Government of India (GoI)’s strong focus on the development of India’s infrastructure. India produces more than 0.4 million engineers every year. Moreover, India’s cost of skilled labour is the lowest in the world, with an entry‐ level engineer available at an average cost of about US$ 8,000 per annum.
Government expenditure on infrastructure is likely to result in increased construction expenditure of nearly US$ 253. 94 billion (INR 12,189 billion) between 2008–09 and 2012–13).
India is the fifth‐largest producer of crude steel in the world (2008), with a production volume of 54.5 million tonnes.
www.ghallabhansali.com
5
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21st July, 2010 Investments The GoI’s thrust on infrastructure development has provided considerable impetus to the construction equipment industry. The industry has witnessed a steady flow of investments since the third quarter of 2006. Investment in the industry at the end of the December 2009 stood at more than US$ 616.04 million (INR 29.57 billion), spread across 22 projects. Some of the projects set to be commissioned in 2010 are: o Liugong India has invested US$ 72.9 million (INR 3500 million) in Phase II of its earth‐moving equipment manufacturing facility in Madhya Pradesh, which is scheduled for completion by September 2010. o Tractors India Ltd (TIL) is investing US$ 52.08 million (INR 2500 million) in infrastructure equipment projects in West Bengal. These are scheduled for completion by May 2010. o WirtgenIndiaʹs US$ 6.25 million (INR 300 million) compactors project in Maharashtra is expected to be complete by September 2010. o AutometersAllianceʹs lifts and elevators manufacturing facility in Uttar Pradesh is scheduled to be operational by March 2010. o TILʹs road construction and coal handling machinery project in West Bengal is expected to be complete by July 2010. Policy and regulatory framework The GoI has permitted 100 per cent FDI in construction and development projects to attract more investment. Some of the key specifications are US$ 2 million limit on lump sum payments under the automatic route. Royalty to be levied as 5 per cent on domestic sales and 8 per cent on exports, net of taxes. The depreciation on general plant and machinery is proposed at about 15 per cent. Specific initiatives by the GoI that positively impact the engineering sector are Tariff protection on capital goods has been removed. Various initiatives are focused on infrastructure development and construction. The GoI has also introduced initiatives to increase power generation and improve the quality of power supply. o Custom duties on various equipment have been reduced. www.ghallabhansali.com 6
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21st July, 2010 Globally, the growth in the industry has been led by emerging economies; the economic crisis in 2009, however, put a brake: USA is the largest mining and construction equipment market in the world followed by China (around 0.3 million units) and Europe (around 0.2 million units). The global CE industry has been on an upswing since 2003‐04 and has grown by over 15% annually until Q3, 2008‐09. The growth was more pronounced in and was mainly driven by the fast growing BRIC nations of China and India. The global CE industry experienced a contraction in Q3 2008‐09 as a result of reduced construction activity, especially in the real estate segment; slowdown in mining activity and a virtual standstill in equipment financing in the aftermath of the economic meltdown towards the end of Q2, 2008‐09. The fall in demand was led by sharp declines in the key markets of Europe, Japan and North America. Barring certain markets like China, the global CE industry continued to fall in the first nine months of 2009‐10 as well, although the magnitude of global decline slowed down to around 4% in Q3, 2009‐10. The mining industry on the other hand has shown stronger signs of recovery in Q3, 2009‐10, as commodity prices started inching upwards. In addition to China, where there has been a full scale recovery of demand supported by fiscal stimulus and advancement in large‐scale infrastructure development, markets like Australia, Brazil, India, Indonesia and. Among the developed countries, the Japanese market witnessed full usage of rental equipment in Q3, 2009‐10. New MNC entrants setting up base in India: Many international original equipment manufacturers (OEMs) have indicated plans of setting up manufacturing facilities in India owing to its good growth prospects and slack demand in the traditional developed markets. Some of the new entrants in the past 3‐4 years were Japan’s excavator major Kobelco and ME company Komatsu; CE and farming equipment major, John Deere (USA) in JV with Ashok Leyland Limited; excavator & CE company Sany & Liugong (China) and MCE majors Hyundai and Doosan (Korea). Further, existing participants like Caterpillar and excavator manufacturer Telco construction Equipment Company Limited (Telcon) are either adding to their domestic capacities or increasing their product portfolio. With the incremental capacities and new entrants, the industry is expected to become more competitive and fragmented. However, growing mechanisation and large infrastructural projects proposed in the country indicate the potential to absorb these new capacities. The entry of global CE manufacturers has also facilitated product upgrades in the growing Indian market. www.ghallabhansali.com 7
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21st July, 2010 Used and rental equipment markets are still in their nascent stages: While there is good potential for used equipment in India, the market size of which is estimated at about three times the primary market, India does not have an established common platform for trading in used equipment. Again, the current rental penetration in India at around 7‐8% remains low as compared to the global standards of 50‐80%. An average of 30% of the equipments sold in Europe and over 60% in the United Kingdom are to rental operators. A robust rental market enables reduction in investments in projects by outsourcing the equipment requirement (including spares and services) and improving capacity utilisation of equipment. The key equipment in the rental fleet in India currently are backhoe loaders, pick‐and‐carry (PNC) cranes, excavators, motor graders and vibratory compactors. With the large infrastructure investment proposed over the next few years, demand for rental equipment is expected to see a large growth over the medium term. Globally, a number of OEMs like Caterpillar Inc, JC Bamford, UK and Volvo are actively involved in the equipment rental business, an area that has not caught on in India as yet. Conclusion: Over the past four months, the industry has been on an upturn supported by increased financing availability; step‐up in infrastructural investments and pick‐up in demand for commodities globally. Large proposed investment over the next several years in infrastructure (ports, airports, roads) has the potential to sustain the growing demand for CE. The Eleventh Plan commission (2007‐12) envisages the need for an infrastructure investment of over US$ 155 billion for development of roads, bridges, railways, ports and airports and over US$ 2 billion in mining. Capacity expansion in the steel, cement, oil refining and power sectors to meet growing infrastructure investments in India, is also expected to generate demand for construction equipment. The equipment rental business is another opportunity driver, with the industry expected to double in size to 16 per cent by 2015. The export opportunity is expected to grow on the back of rising cost pressures on developed countries and due to the emergence of low‐cost competitive suppliers and original equipment manufacturers (OEMs) in India. The CE industry has a critical role to play in making India one of the world’s top five economies by 2025. Construction equipment players have a unique opportunity to help realise the potential of this sector and, in doing so, garner their share of the US$ 12 billion to US$ 13 billion revenue potential. www.ghallabhansali.com 8
Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010 Key players
Company Bharat Earth Movers Ltd (BEML) Revenue (in US$ million) Focus industry segments Products Crawler dozers, wheel dozers, excavators, dump trucks, loaders, backhoe loaders, pipe layers, walking draglines, rope shovelsand sprinklers Excavators, compactors and tele‐handling equipment, skid steers, wheeled and backhoe loaders, telescopic handlers, engines and vibratory single‐drum compactors Crushing, screening and milling equipment, pressure vessels, material‐handling equipment, steel plant equipment, process equipment such as flotation cell and thickeners
638
Mining, construction, defence, rail, metro
JCB India Ltd
299
Construction, housing, quarrying, agriculture
Mcnally Bharat Engineering Co Ltd
256
Power, steel, aluminium, material‐handling, coal washing, port cranes, civic, industrial water supply Power transmission, material‐handling equipment Power and steel plants, ports, fertilisers, mining Infrastructure construction, heavy engineering, industrial projects, power projects, ports and shipyards, dams, roads, coal mines, steel
Elecon Engineering Co Ltd TRF Ltd
217
Elevators, conveyors and moving machines, gears and crushers Stacker reclaimers, level luffing cranes, wagon trippers with side arm charger, rotary breakersandring granulators
159
Action Construction Equipment Ltd
100
Hydraulic mobile cranes, mobile tower cranes, fixed tower cranes, back hoe and wheeled loaders, lorry loaders, forklift trucks, crawler cranes, piling rigs, vibratory rollers and tractors
Gujarat Apollo Industries Ltd Eimco Elecon (India) Ltd L&T Komatsu Ltd
56
Road construction and maintenance
Asphalt plants, paver finishers, wet mix plants, bitument sprayers, kerb pavers, compaction equipment, crushing and screening machines, road‐marking machines and allied equipment Side dump loaders, load haul dumpers, and blast hole and water well drilling rigs Hydraulic excavators, components and hydraulic systems
32 25
Mining Construction
www.ghallabhansali.com
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Ghalla Bhansali Stock Brokers Pvt. Ltd.
21st July, 2010 Mahesh Babaria [email protected] Mittal Chheda [email protected] Disclaimer:‐
This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited (Ghalla Bhansali). This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed 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, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansali reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
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