27 February 2020

LEASE & RENTALS

Very low market penetration

 

 

Compared to global standards, the construction equipment rental segment in India has extremely low penetration. Rentals’ growth will likely be constricted further considering that CERA wrote a distress letter to the FM requesting EMI moratoriums... says Satish Chavan.

 

 

 

 

Fast Facts

 

  • Low market penetration
  • ICEMA-CERA work for deeper penetration
  • CERA demands EMI moratoriums
  • CAGR of  5.52 %

 

 

The construction equipment rentals segment is currently fighting for survival. Recently, the Construction Equipment Rental Association of India (CERA) wrote a SOS letter to Union Finance Minister Nirmala Sitharaman demanding a moratorium on bank EMIs up to 31st March 2020.

 

“The situation is grave and hence we request Govt of India to intervene on SOS basis and advise all banks for moratorium on EMIs up to 31st March 2020 and issue directive in this regard”, wrote CERA Secretary General Satin Sachdeva in the letter.

 

“We have not received any response so far from the government. However, we have received a positive response from government on our request of lowering down the GST to 5 percent from which is currently very high at 18 percent. Government has considered our request and has asked GST Council to analyse our demand. We hope that our other demands will also be looked into by the government”,informed  Sachedva, in an exclusive  interview given to Construction Opportunities recently.

 

He said, “Construction equipment rental industry of India is passing through a tough patch due to economic slowdown and fall of major infrastructure companies like IL&FS, Punj Lloyd, Era, etc and various builders due to which the market has become highly insecure as the infrastructure companies are unable to clear our payments”.

 

“Consequently, it has become difficult to pay our EMIs of machines that we bought and are running on rent, and danger is looming on the existence of the equipment rental industry and the jobs of lakhs of operators and mechanical staff”, he added.

 

The equipment rental companies buy equipments through loans/financing from banks and give equipments on rental to infrastructure companies. The letter was also sent to all the banks.

 

As part of its efforts to transform the unorganized equipment rental industry into an organized one and increase the rental penetration in India, CERA officials met the Indian Construction Equipment Manufacturers Association (iCEMA) officials in Bengaluru recently and discussed the way forward out of this slowdown.

 

Sachdeva of CERA described the meeting as positive, progressive and futuristic for the entire equipment fraternity, including equipment manufacturers and equipment rental industry.

 

The two organizations also discussed future market trends in CE sector and the upcoming EXCON 2019, the largest construction equipment trade show in South Asia.

 

iCEMA President Sandeep Singh expressed concern over low equipment rental penetration in India as compared to developed countries like Japan, Europe or US, but expected a growth for rental business.

“As the country steps up its Infrastructure building activity, we expect the rental business to expand its reach”, he said.

 

Sandeep Singh told, CERA is attempting to establish a framework for this growth. They are studying best practices from Global Rental Associations and attempting to formalize the Indian rental business with Standards, Documentation, Guidelines and Procedures for Commercial transactions”.

 

“They are also reaching out to the OEM’s to establish a mutually beneficial relationship that could build on Technology Advances, better support for the equipment they rent and of course training of operators and mechanics”, he added.

 

Satin Sachdeva said, “CERA believes in building relationships for mutual growth and benefits” and thanked ICEMA for taking initiative and take things forward.

 

This meeting is being seen as significant by construction equipment sector especially in the times when the infrastructure sector is passing through economic slowdown.

 

 

Market Dynamics

 

If you can’t own it...rent it!!

 

As it is, a low market penetration in India reveals a huge rental market just waiting to be tapped. Add to this the current liquidity crisis among construction companies and the fact that plenty of Greenfield construction projects are going to be awarded by the government. All this amounts up to a huge opportunity for renting out construction equipment in the Indian market. But these rental opportunities will materialize only with availability of easy financing. Customers will opt  to rent equipment only if there is direct access to viable financing options attuned to their needs. However, the current lack of uniform financial regulations and the absence of several large organized rental players are major challenges for equipment rentals. Equipment OEMs are also entering the rental space in India, either with dealer-run rental operations that offer new and used equipment or independent franchise-run rental operations. Reforms in regulatory norms for financing can also help boost NBFCs’ role in overall financing and help reach customers across India. Easy rental availability allows companies to avoid capital equipment purchases for small players and increases participation in the industry. Organized rental players can offer the latest- technology equipment, with trained operators and mechanics, which allows companies to go ahead with project execution.  Companies are under a lot of pressure to trim capital outlay, and hence they increasingly rent equipment  for their ongoing projects. 

 

But the lack of a developed rental ecology is the biggest cause for low penetration of rental equipment in India. To develop the required ecology there is a need for equipment safety and environmental regulations on par with global standards. Lack of skilled manpower for operating construction equipment is another cause for low penetration.  Therefore organized rental players are unable to offer an attractive value proposition to the client. In mature markets like the EU, United States, and Japan, big rental companies offer latest equipment with an average fleet age of only two to four years, and they also provide lower maintenance costs and offer qualified operators. If organized rental players and the government can put in place a rental ecosystem that allows easy purchasing or renting based on flexible payments, the demand for construction equipment rentals will rise dramatically.

 

 

Penetrating a latent market

 

“Since the market share of rental companies in India is just 7 percent, definitely there is huge potential. Despite India being among top countries for infrastructure development and construction in future, increasing the market share of equipment rental companies will be a challenge,” informs Sachdeva.

 

He adds, “Due to the issues of GST input, the construction companies are themselves buying the construction equipments. Consequently, the hirers have been hit quite badly. We are already trying to resolve the issue by talking to construction companies. Hopefully, we will find the mutually beneficial solution soon.”

 

In India, the construction equipment leasing is still in a nascent stage and just accounts for 6-8% of the overall construction equipment market. Whereas the global average for leasing is 50-60% of the overall construction equipment business. The construction equipment leasing business is the upcoming business sector in which suppliers and other professionals can rent out unused or idle equipment to other contractors and professionals. But it has a lot of challenges to be overcome is an unorganized sector. The major challenges are unprofessional vendors, delayed projects, breakdowns of equipment, and no immediate alternatives in case of breakdowns.

 


ECE types

 

Earth-moving Equipment; includes backhoe loaders, wheel loaders, steer loaders scrappers, excavators, bulldozers and tippers. This group accounts for up to about 70 percent.

 

Material Handling Equipment; comprises tower cranes, bulk material handling, mobile & hydra cranes.

 

Concrete Equipment; includes transit mixer, batching plant, concrete pumps, and aggregate crushers.
 

 

Recently some Start-ups have come up to change its game dynamics with solutions to the common problems, like a structured process with end-to-end transactional tracking, competitive pricing with productivity and operations monitoring mechanism, flexibility in leasing hours for any equipment. The construction machinery can be idle at your vicinity, but if not listed on any online platform cannot be discovered for the purpose. So the start-ups have come with an idea of an online marketplace for construction machinery. 

 

 

 

Market Snapshot

 

According to Mordor Intelligence, the India construction equipment rental market is anticipated to register a CAGR of about 5.52 % during the forecast period (2019 – 2024). The rental market is segmented by vehicle type (Earth Moving Equipment, Material Handling), and by drive (IC Engine and Hybrid Drive).

 

The increasing focus on infrastructure and development of automation in the construction and manufacturing processes had a significant impact on the market growth. The road construction machinery market has witnessed significant growth in the recent past, owing to the increased road development programs undertaken by the central and state government.

 

The renting or leasing of construction equipment has been on the rise, owing to the equipment cost and the cost of the maintenance process. Apart from the cost, there are also other benefits associated with renting the construction equipment. Rental companies provide the machinery, along with the required professional machine operators and drivers, included in the rent.