Sound Option: Leasing route to procure construction equipment

Leasing route to procure construction equipment

The Indian construction equipment rental and leasing market is currently sized at about $2 billion with around 20 per cent of the total construction equipment in the country available for hiring annually. At present, renting or leasing of equipment takes place mostly through brokers on a local basis and the unorganised segment caters to nearly 70 per cent of the rental and used equipment volumes.

Globally, renting and leasing of construction equipment is a well-established business. Countries such as the US and China have high penetration of equipment leasing at about 65 per cent and 35 per cent respectively. Comparatively, India’s rental market is immature and has a market penetration of 7-8 per cent only. However, this scenario could change going forward, with the growing demand for construction equipment, and developers trying to increase their fleet size and access new technologies while maintaining lower costs.

Sourcing options: Buying versus leasing

There are essentially four sourcing options that an infrastructure developer has while procuring construction equipment. These are buying, renting, leasing and others (such as hire purchase and finance lease).

An infrastructure developer can buy construction equipment directly if he forecasts suitable requirement for the equipment. The advantage that buying offers is that the buyer gets immediate ownership of the equipment and can claim depreciation and interest against the equipment and bring down the firm’s taxable income.

Alternatively, the developer can rent or lease the equipment. When the equipment is used for a few days in a year, a developer might opt for the rental route. Renting offers the most economical, flexible and risk-free way of trying equipment. However, if the developer wants to use the equipment for a longer period of one-five years, he could prefer leasing the equipment. Leasing offers a usage arrangement rather than ownership and does not require any upfront cash payment. The advantage of leasing is that companies can write off each lease payment as an expense and bring down their tax liability. Also, some lessors pass on the depreciation benefit to the lessee in the form of a lower lease payment, thus reducing costs for the lessee.

Under hire purchase, a developer can purchase the equipment with a certain portion of the payment as a down payment, and the remaining paid as regular fixed payments spread over a given time frame. Under finance lease, fixed rental payments are made over the course of the finance lease contract. At the end of the agreement, there is an option to extend the lease period or return the equipment.

Advantages of leasing

Leasing offers several advantages over other sourcing methods. First, leasing does not require the procurer to make any upfront capital investments. This allows the developer to enter a project at a lower capital cost. It also eliminates the storage and maintenance costs related to the equipment. In the case of a breakdown, a lessor is responsible for getting the equipment repaired.

Third, it eliminates the possibility of equipment becoming obsolete and outdated for the procurer. This shields him from market fluctuations. Finally, leasing leads to higher efficiency gains for the procurer who can enjoy the benefits of depreciation and claim lease payments as an expense before tax, even without owning the equipment. In addition, the procurer also gets the freedom to try out various types of equipment before he decides to purchase a particular one.

Construction equipment financing market

Procuring construction equipment requires significant capital outflow and financing remains a good way for procurers to purchase equipment. Financing accounts for about 80 per cent of the total domestic equipment purchase and about 90 per cent of the total imported equipment purchase. The Indian construction equipment finance industry is expected to have grown from about Rs 230 billion in 2011 to about Rs 460 billion in 2014 and Rs 620 billion in 2016, a compound annual growth rate of 22 per cent. Banks mainly cater to the needs of large players while non-banking financial companies cater to all levels of the market including small- and medium-sized players.

Besides financing, there are three types of lease which are offered. Under the fair market value lease, the procurer can either return the equipment, renew the lease or purchase the equipment at its fair market value at the end of the lease period. Under a dollar buyout lease, a lessee can purchase the equipment at the end of the lease term for $1. This is very effective for entities that wish to retain the asset after the lease term, but has the disadvantage of a higher monthly lease price. Under a wrap lease, a developer who requires new equipment on a regular basis can consolidate its remaining payments and roll them over to a new lease with the additional equipment that it procures.

Major players in equipment leasing

The construction equipment leasing market in India is highly unregulated. There are only a limited number of organised players who have significant rental fleets. These players face high pricing competition from unorganised players, who offer off-the-book cash transactions and thus much lower rates. In the absence of established trading platforms and a lack of buyback schemes from original equipment manufacturers, the used equipment and secondary sales market is also underdeveloped. Thus, ownership still remains the preferred option for Indian developers.

However, the leasing market is now evolving with the entry of major players such as Srei Infrastructure Finance Limited through its online construction equipment leasing platform – iQuippo. The other major players in the equipment leasing market are Gmmco Limited, Gemini Equipment and Rentals Private Limited, Sanghvi Movers Limited and Tractors India Private Limited.

Introduction of online renting platforms: iQuippo case study

iQuippo is India’s first online marketplace for leased and rented construction equipment. The platform was launched by Srei Infrastructure Finance Limited in October 2016. It allows construction equipment owners to list their assets/ services, negotiate with buyers, finalise terms of the deal, generate digital contracts/invoices, and receive real-time payments. iQuippo also offers a proprietary asset certification programme called iQuippo Certified under which it offers buyers a detailed analysis of the listed equipment. The platform offers total solutions including listing of new and used equipment, information on equipment auctions, equipment finance and equipment valuation. It also offers ancillary services such as equipment shipping, equipment insurance and manpower solutions. This is expected to offer a timely, transparent and cost-effective method for trading in construction equipment.

Conclusion

The equipment rental and leasing market forms a small share of the construction equipment industry in India. This can be attributed to a number of reasons, such as the lack of regulations, a dearth of organised players in the market, and inhibiting tender prerequisites which sometimes require the contractor to demonstrate equipment ownership. However, this scenario seems to be changing with increasing demand for construction equipment being witnessed, and developers trying to increase their fleet size and technologies at lower costs. This is also being facilitated by the introduction of online platforms such as iQuippo.

There is also a need for several changes such as enabling the easier availability of financing for smaller players, improving the regulatory and taxation scenario to facilitate growth of organised players, and reframing tender requirements to prevent making equipment ownership mandatory. These steps will certainly help in increasing the penetration of the equipment rental market and help tap into the larger latent demand from fringe players who are unable to participate.