26 March 2019

Industry Focus- Equipment Finance

Financing Push!

 

The Infrastructure sector is a key driver for the Indian economy and is largely responsible for propelling India’s overall development. The government is focused on initiating policies to ensure the creation of a world class infrastructure in India. However, there is a need to have a clear process of registration which will in a way, organise and assist the equipment market reports, ROHAN AMBIKE.

 

Finance plays a crucial role in the creation and development of any business activity. And financial trends often reflect the state of economic growth being witnessed in a country. With infrastructure development increasingly on top of every nation’s agenda there is a growing need to mobilise capital intensive construction equipment and machinery assets. It is this demand – read as business opportunity – which drives the existence of equipment finance companies.

 

Research and Markets has announced the addition of the "Global Construction Equipment Finance Market 2016-2020" report to their offering. The global construction equipment finance market to grow at a CAGR of 9.9% during the period 2016-2020. The report, titled- Global Construction Equipment Finance Market 2016-2020, has been prepared based on an in-depth market analysis with inputs from industry experts. The report covers the market landscape and its growth prospects over the coming years. The report also includes a discussion of the key vendors operating in this market.

 

Huge demand for construction equipment is the latest trend in the market. Many investment banks and financing companies are entering into tie-ups with construction equipment vendors so that they can help finance their projects. The leasing and financing options offered by these financing companies help the end-users save taxes.

 

According to the report, the online receivable financing market has attracted a lot of key market players, competitors, and customers. The market operates competitive auctions through a global network of accredited institutional buyers. Since traditional financing is considered expensive, many industries are opting for online receivable financing platforms to meet their working capital needs on a daily basis. The online receivable financing market operates as a part of asset-based lending solutions while coming into because it is considered a collateral component in business lines of credit. Further, the report states that shortage of skilled workers in construction activities, such as carpentry, masonry, and brick work, is one of the biggest challenge faced by the construction industry.

 

 

Equipment Acquisition Trends

The Equipment Leasing and Finance Association, the organisation that represents the equipment finance sector has noted some of the top equipment acquisition trends that will play a major role in the coming years.

Strong capital spending

As a result of the improvement in the investment by numerous majors in the equipment and the construction software that has been continuing since 2016, there is a strong chance of the growth in the overall investment in the equipment sector. Additionally, the increased business confidence and the regulations becoming more flexible will together contribute to the growth in the spending.

Strengthening positive momentum

Although the growth of financed equipment acquisitions last year did not exceed overall equipment and software investment growth, equipment finance industry indicators point to increased financing of equipment acquisitions in the years to come. Experts have predicted a healthy equipment and software investment forecast of 9.1 percent for the year 2018-19.

Tax reform benefits

Tax reforms like GST have now settled in and the industry has become acquainted with the system. The reduction in the number of taxes to only the state and the central tax will have businesses pulling the trigger on the equipment acquisitions they had been putting off. Multiple measures of business confidence, including the Monthly Confidence Index for the Equipment Finance Industry, back the probability for increased equipment spending.

Technological advances to improve efficiencies

New technology will be even more irresistible as businesses look for ways to increase efficiencies and profitability as they take advantage of new market opportunities in the growing economy. Attractive financing options will make the latest equipment that may have been considered previously unaffordable even more accessible.

Key equipment verticals

With economic growth drivers, including persistent business optimism, stable credit conditions and healthy global demand, the solid investment growth pattern from 2017 will continue for most equipment verticals. Investment is expected to remain steady or strengthen in equipment verticals, including agriculture, aircraft, construction, industrial, trucks, computers and software.

Innovative financing options

A changing business landscape and disruptive technologies will drive equipment finance companies to meet their customers’ unique demands. Expect more tailored financial solutions to help companies innovate and solve business challenges, such as metered usage that enables customers to pay only for what they consume. Wider use of electronic documents and e-signatures for greater convenience will become increasingly available.

Rise of Automation

As per the experts, currently, the entire process of equipment finacing is tedious and at times takes a full month before the machine is actually handed over to the customer. There is an increasing demand that automation be brought to the equipment finance sector so as to bring transparency and expedite the process of financing. Plans to bring in EMI for equipment sales are also making the rounds.

Managed Services

Every customer plans to have greater flexibility and convenience. However, in recent times, there has beena shift in the customer mindset with them going for managed services (bundling equipment, services, supplies and software), pay-per-use leases and alternative financing will encourage equipment finance companies to find innovative ways to meet the demand.

 

 

Challenges of Equipment Financing

For companies to improve equipment financing in India, four challenges need to be addressed:

Lack of easy access: Owing to the lack of in-house financing arms with OEMs, companies select engaging in short-term tie-ups with banks or NBFCs. First-time users, although forming about 30 per cent of the customer base, face high-margin money requirements of 20 – 25 per cent, compared with just 5 – 10 per cent for repeat customers, which dampens equipment demand, as per a recent study by ATKearney.

Challenges in collection: Most finance users are micro, small, and medium-sized enterprises that depend on third-party payments, which can lead to collection delays and defaults. As a result, the average number of days of sale outstanding can reach 150 for organised rental players. Further, most of the financing business is handled by NBFCs, which face significant recovery challenges because of a lack of adequate regulatory support.

Unfavourable regulations: Indirect taxation on construction equipment in India is 21 - 38 per cent , higher than France and Germany's 20 per cent and Indonesia's 12 – 17 per cent , according to a CII report. Further, lease transactions are subject to dual taxation: a value-added tax (VAT) and a service tax.

An array of entry taxes and lifetime Regional Transport Office (RTO) taxes imposed by various states make moving construction equipment between states unviable. In addition, the 15 per cent depreciation rate for construction equipment assets (compared with 30 per cent for commercial vehicles) is too low compared to the falling asset life as a result of rapid technological progress and equipment obsolescence. Moreover, for interest paid to NBFCs on loans for equipment financing, tax is deducted at the source, which is not the case with banks. In addition, external commercial borrowing as a source of funds is available only when purchasing imported equipment; it is not available for domestic equipment, highlights ATKearney report.

Low rental penetration: Organised players with large rental fleets are in limited numbers in India because they lack the capital to expand. Organised players also face huge pricing competition from the unorganised segment, where players are involved in off-the-book cash transactions and can therefore offer much lower rates. Used equipment and the secondary sales market are also highly underdeveloped in India because of an absence of established trading platforms and a lack of buyback schemes from OEMs. Above all, ownership still remains the preferred option for Indian users.

 

Growth Fortunes

With the growth of the rental market picking up in India and specially in tier II and tier III towns, good times ahoy for construction equipment in India. The ‘pay-as-use’ model is witnessing growth momentum as it substantially reduces costly breakdowns and eliminates storage costs.

In this context, a recent study points out that the global construction equipment finance market to grow at a CAGR of 9.9 per cent during the period 2016-2020. Technavio’s market research analyst highlights that since many construction companies have to choose between buying or leasing equipment or putting their funds into projects, lending companies offer them options to lease equipment. As renting helps construction companies to save in taxation and also allows them to pledge the equipment as collateral, it is increasingly being preferred over buying a new equipment as operators are exempt from depreciation charges.

The APAC region has the biggest market share in the construction equipment finance market and is expected to generate close to $118 billion by 2020. In this region, the enormous demand for rental equipment will boost the market demand for financing companies over the next few years.

Due to the availability of equipment financing, construction companies can easily find cost-effective loans. Online financing is another upcoming option available to customers, which would ultimately help them use available working capital efficiently. The scenario in the construction equipment financing market is quite complicated as many construction companies have money tied up with debtors in inventory and receivables. Cash flow management plays a very crucial role, and companies are looking for ways to increase cash flow. In this market, the lenders and borrowers work together to find viable solutions, which in turn will help to spur the prospects for market growth. All in all, it’s a fortune cookie for construction equipment companies in India.

 

High Hopes

Owing to the prevalent uncertainties and evolving opportunities from the mid-sized to small construction equipments, financiers even involving NBFCs, are now looking to explore new areas. Another demand put forth by equipment financiers are clearance of pending bills and fast tracking of held up infrastructure projects. It is felt an improved scenario will ultimately aid equipment financiers in generating surplus cash to pay off pending liabilities. Prospects of development will help CE manufacturers to generate cash flows which can then be invested in purchasing new equipment, ultimately benefiting equipment financiers. Opportunities are also expected to evolve from the after-sales service market, through maintenance contracts.

The global aftermarket demand is expected to increase marginally by 4.4 per cent during 2018 due to slowdown anticipated in some developed markets, global research firm Frost & Sullivan said. "A slowdown in replacement demand in some developed markets, including the US and Western Europe, will impact overall aftermarket growth,” the research firm said adding that this trend has forced the automotive aftermarket to look toward expanding in emerging markets like China, India and Eastern Europe.

"Participants in the OEM aftermarket who embrace potential data monetisation opportunities that can be optimised by enhanced customer accessibility, widening B2B networks, and expanding product and service portfolios, will capitalise on current value-add opportunities and ensure future success," it added. With original equipment manufacturer (OEM) attempting to integrate all aftersales services into a single, digital platform, telematics, e-commerce and 3D printing will form key foundations in the evolution of the OEM aftersales channel, says consulting firm Frost & Sullivan.

The government’s path-breaking initiatives such as Make in India, 100 smart cities and a liberalised FDI regime will further boost both these interrelated sectors. Infrastructure financing in de-marketed projects is the need of the hour. Though those are modest figures any statistic that shows progression should inspire a leap of faith. The verdict right now is that there is light for construction equipment finance players at the end of India’s infrastructure development tunnel. And that should be good news.

 

“We have always followed a customer centric business model. Our customised financing solutions, enrich the customer with better cash flows, extended facility tenure; backed by simple documentation and quick processing time. In addition to these practices we will provide loyalty programs like ‘Pre Approval Limit”; wherein the customer is provided Limit Approval based on past track record. Additionally, for this edition of Bauma, we are partnering with many globally reputed equipment manufacturers and have come up with specific offerings for our customers at the event. ”

Ramesh Iyer, Vice Chairman & MD, Mahindra Finance

 

 

 

“In addition to providing construction, mining, and allied equipment (“CME”) financing, as part of our growth strategy, we intend to continue to expand our operations in other business verticals as well. We plan to enter into partnerships with new Original Equipment Manufacturers (OEMs) and vendors and expand in equipment categories and business verticals with attractive growth opportunities. We aim to strengthen our relationships with OEMs by increasing original spare part sales. This will also help in the upkeep of our funded equipment. We also plan to partner with OEMs and dealers for financing refurbished assets. We are continuously attempting to optimize borrowings and explore alternate avenues of funding.”

DK Vyas, CEO, SREI Equipment Finance




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