Low Penetration: Despite obvious benefits, rental and leasing market remains largely untapped

Despite obvious benefits, rental and leasing market remains largely untapped

The heavy construction equipment rental business in the country is still in its infancy. Rental penetration stands at 7-8 per cent as compared to global standards of 50-80 per cent. At present, the key equipment in the rental fleet comprises backhoe loaders, excavators and mobile cranes. The rental construction equipment industry is very small, highly unorganised, fragmented and mostly dominated by small and regional /third-party rental companies when compared to developed countries. However, with big players in the industry opting for providing rental services to construction companies, original equipment manufacturers (OEMs) are gradually gaining a foothold in the market.

Key benefits and enablers

Buying construction equipment requires huge capital investments, while the funds required to rent equipment are obviously much less. Renting construction equipment leads to savings on manpower and administrative costs as well as obviates the need for mechanics and other staff, as they are provided by the rental company itself. Maintenance and repair costs are also taken care of by the rental company. Further, there are huge savings on warehousing costs as the equipment is returned once the work has been completed. Given that the construction sector is highly dynamic, the rising or falling cost of equipment can significantly affect the business. Further, renting equipment can provide the necessary cushion to construction companies against unforeseen financial downturns. With equipment renting, the construction company can supplement its core fleet at much lower working expenses and expand its fleet’s working capacity to meet project deadlines and take up bigger projects at competitive prices. Renting allows construction players to try out the machines extensively without having to spend funds on buying them, which in turn, gives them enough experience with the machine. This helps the construction company to decide whether or not to actually buy the equipment subsequently.

Construction companies are usually under a lot of pressure to trim capital outlay and hence it is better for them to rent equipment on a monthly or hourly basis. Especially in the case of projects that have a duration of less than three years, renting construction equipment is a better option than buying it. Often, short-term projects or one-off jobs need specialised equipment. For these projects, renting equipment is definitely an optimal option.

The growing need to replace outdated machinery with the latest available technology as well as the increasing expenditure on infrastructure will contribute to the growth of the construction equipment rental industry. An-

other major factor aiding the growth of the rental business is the introduction of GPS monitoring and control systems in the newer machines besides other new technologies that are being deployed in construction equipment, enabling rental companies track their equipment. The construction equipment rental market is expected to receive a boost in the coming years due to the a leasing option, which has enhanced consumer service by ensuring high product quality, quick response, timely delivery, and planned pick-ups.

Recent trends

Leasing – an attractive proposition: India has traditionally been an outright equipment purchase market for project requirements. The scenario is changing slowly. Large contractors that earlier used to outsource only earthwork and other non-essential activities have begun subcontracting more and more activities. Consequently, leasing options with the attendant tax benefit opportunities are becoming more attractive. There are signs among finance companies that the market is becoming more receptive to alternative financing options. Equipment leasing, although prevalent around the world, is a relatively new concept in India. Still, the past few years have seen corporates and large buyers warming up to the concept of leasing equipment.

OEMs establishing a footprint in the rental business: Globally and domestically, the equipment rental market is seeing a greater presence of equipment manufacturers unlike the past when third-party operators dominated it. Renting equipment is emerging as a new vertical that equipment manufacturers have started promoting. Construction companies increasingly prefer to rent from equipment manufacturers given the additional services and expertise they provide. The trend of renting equipment directly from manufacturers is bound to grow in the years to come, thereby benefiting OEMs.

Rising demand for renting specialised equipment: Rental penetration is high in certain specialised and complex equipment types such as cranes where rental penetration is estimated to be 40-60 per cent. Growth in these specialised sub-sectors will continue to increase the average penetration levels for the entire industry.

Key constraints

  • The heavy equipment rental business in the country is facing various challenges like the non-availability of new machines for rent, rentals mostly restricted to low- and medium-value and general-purpose equipment, lower availability of technologically advanced equipment for rent, and current rental players having a limited service offering.
  • One major problem that the equipment rental sector faces is the lack of servicing in remote areas where the machines are increasingly being deployed. Inadequate service facilities in such areas is impeding the growth of the equipment rental market.
  • There are a limited number of organised players with large rental fleets because players lack the capital to expand their product offerings. Organised players also face huge competition in terms of pricing from the unorganised segment, where players are involved in off-the-book cash transactions and can therefore offer much lower rates.
  • The preference for asset ownership has also led to lower penetration of rentals as companies still feel pride in equipment ownership. On the contrary, in the international market, rentals play a very important role as companies sell surplus items at regular intervals through unreserved auctions while the items still have value.
  • The used equipment and secondary sales market is also highly underdeveloped in India because of an absence of established trading platforms and a lack of buyback schemes from OEMs. In the absence of a structured used equipment market, most of the sales take place at the local and regional levels, and through middlemen (brokers). The limited availability of information and the lack of transparency allow brokers to manipulate the demand/supply of used equipment and make huge margins at the cost of the buyers and sellers. Further, the existing sparse secondary trades are based on non-standardised transaction prices.
  • Another factor inhibiting rentals is tender prerequisites, which often require the contractor to demonstrate equipment ownership.
  • The lack of a skilled workforce to operate the machines coupled with the fluctuations in fuel prices is expected to have a negative impact on the rental equipment industry.

Future potential

India is emerging as a key international market for equipment rental. Rental equipment has become one of the leading end-use markets for construction equipment. Particularly, the rental market is expected to pick up in Tier II and Tier III cities with demand coming from small- and medium-scale contractors. Further, with customers seeing the value proposition of rental equipment, the industry is bound to grow in the future. If OEMs, organised financing players and the government all contribute to an ecosystem that encourages easy rental, flexible payments, and convenient disposal of construction equipment after use, the demand for construction equipment will rise at a much higher rate than expected. Traditionally, leasing activity has been plagued by double taxation, that of service tax and sales tax. Under the goods and services tax (GST), the issue has been resolved with only a single tax in play. This single-tax system will boost leasing activity in the infrastructure sector, eventually translating to benefits for the construction equipment sector as a whole.

Hiring of equipment, especially utility equipment, is also growing. There are a few large companies in the crane hiring business that are offering rental services. Going forward, there is a good growth potential in this segment and the market is likely to witness the entry of more players at the national as well as regional level from the organised sector. Increased spending on construction of roads and highways and the creation of smart cities is bound to create an increased demand for equipment rental services across the country. In an attempt to bring the road density in India at par with international counterparts, the equipment rental sector is getting a much required boost.

Another important aspect of the construction equipment industry is the secondary market for used equipment. There is no organised player in this segment. The cost of used equipment is only half that of new equipment. The risk too is very low both for customers and the lender (providing equipment finance). Therefore, this presents an opportunity for organised players to tap the potential of the second-hand construction equipment market.