The infrastructure sector is a key driver for the Indian economy and is largely responsible for propelling the country’s overall development. The government is focused on initiating policies to ensure the creation of world-class infrastructure. As per the 2018-19 budget, the total estimated capital expenditure towards the infrastructure sector stood at Rs 5.97 trillion. This increased allocation is expected to have a positive impact on the construction, mining and allied equipment (CME) sector. Further, the infrastructure sector has also witnessed increased attention from foreign investors. According to the Department of Industrial Policy and Promotion, foreign direct investment (FDI) in the sector (townships, housing, built-up infrastructure and construction development projects) from April 2000 to June 2018 stood at Rs 2 trillion.
In the road sector, the hybrid annuity model (HAM), in which the government bears 40 per cent of the project cost, is being increasingly used by the National Highways Authority of India. The entry of new contractors also affirms that the sector is on the road to progress. Similarly, initiatives have been taken to fast-track railway sector development with modernisation of stations, development of dedicated freight corridors, focus on safety, high speed rail projects, etc., all of which will bring huge opportunities for the CME industry. The irrigation sector is being revived with renewed vigour as seen in the states of Telangana and Maharashtra. Capacity additions in port and greenfield airport projects (in Mopa and Navi Mumbai) have brought hope to these sectors.
Overview of the CME sector
According to Feedback Consulting, the CME industry has witnessed a revival since 2015-16, preceded by a decline in the previous three years. The industry, which grew by 22 per cent in 2017-18 (101,900 units) as compared to 2016-17 (83,600 units) in terms of unit sales, is expected to see heightened business activity as the government is likely to invest heavily in infrastructure. Earthmoving machines form the majority of the total CME sales. This is largely attributed to the positive movement in select sectors such as roads, irrigation and railways. These sectors have experienced a push from the government in the past two years.
According to Feedback Consulting, the CME industry is expected to grow at a compound annual growth rate (CAGR) of 14-15 per cent for the next three years till 2020-21 to reach a volume of 153,000 units. Going forward, there may be some disruptions in the industry both from a product and service perspective. Some likely developments include growth in the prefabricated concrete business, increased use of specialised equipment, rising manual labour costs and a digital drive.
Overview of the CME financing segment
Construction equipment finance caters to earthmoving, concrete, material handling, road construction, material preparation, tunnelling and drilling, and warehousing equipment. CME finance in India is offered by non-banking financial companies (NBFCs), banks and captive or private financiers.
As the segment requires large capital expenditure, financing accounts for 80-85 per cent of the total equipment purchased, and in the case of overseas purchases, it accounts for approximately 90 per cent. Most of the financing is procured through loans while leasing is the second most common mode of financing. Of the earthmoving construction equipment users, 80-85 per cent of those who opt for finance are micro, small and medium enterprises with transaction sizes varying from Rs 2 million for a backhoe loader to Rs 4.2 million for an excavator. Though the cost of construction equipment is 10-30 per cent of the project cost, the presence of CME financiers assists in productivity and efficiency.
Feedback Consulting estimated the total CME finance disbursement for 2017-18 to be approximately Rs 374 billion. Over the past six years, disbursements to the sector have grown at a CAGR of 10.9 per cent. During the recovery period from 2014-15 onwards, the industry grew at a rate of 24.4 per cent.
The construction equipment finance industry is expected to grow at a CAGR of 20-21 per cent for the next three years till 2020-21. With the currently announced projects which have mostly started from the third quarter of 2017-18, demand for earthmoving equipment will continue, and will have a 68-70 per cent share of the overall CME finance market. Banks and NBFCs are expected to have an equal share in the CME finance industry for the next one to two years and the equipment leasing industry is expected to grow at a CAGR of 15-16 per cent till 2019-20.
At present, the equipment finance industry has 20-25 organised companies (NBFCs and banks) offering various products and services for the infrastructure equipment segment. The top five companies account for approximately 73.1 per cent of the overall CME finance market. Among the top five companies, two are NBFCs and three are private banks. According to a report by Feedback Consulting, Srei Equipment Finance Limited (SEFL) leads the construction equipment finance market with a market share of about 33 per cent in 2017-18, followed by HDFC at 14.1 per cent. Currently, SEFL is the only end-to-end solution provider across the entire CME value chain, from acquisition to deployment, management and resale of the asset, and managing customer relations across the entire asset life cycle. SEFL has demonstrated clear market differentiation through its holistic approach towards providing equipment financing solutions.
Major trends in the CME financing industry
Revolutionary trends seem to be emerging in the equipment financing sector. Some of these are:
- Integrated offerings: Dealers and original equipment manufacturers (OEMs) are expected to offer customers integrated choices which will include equipment finance (and could also cover the life cycle financing of the equipment).
- Automation of process: Current equipment financing takes anywhere between 5 and 30 days before the machine is handed over to the customer. Equipment financing companies need to move to an automation route to sustain and survive in this technology-led market. A major differentiator could be transparency in a process to manage documentation, including, for example, equated monthly instalment payments.
- Platform-based offerings: Currently, there are few companies which provide a platform for equipment owners and customers to interact and avail of equipment services. This could be a good opportunity for finance companies to participate and ensure that all finance needs are met.
- Managed services: Customer demand for greater flexibility and convenience will augment the use of non-standard financing agreements. A shift in customer preference 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.
- OEM tie-ups: Another trend worth noticing is a tie-up of construction equipment majors with banks and NBFCs exclusively for their customers. This arrangement helps OEMs to meet the level of financing support expected by their customers. Preferred financiers collaborate with OEMs and their dealers to offer enhanced quote and credit approval turnaround, allied with competitive financial solutions. The OEM and financier tie-up can be an exclusive alliance or a preferred financier tie-up with OEMs to avoid risk/loss pool arrangement, loss sharing arrangements, subvention and credit days.
The government has taken important steps to streamline the economy. New policy measures were announced to make the business environment more conducive and transparent. The goods and services tax (GST), the biggest reform, is a game changer as it will bring the much-needed ease of doing business and catalyse growth of the infrastructure sector. Further, GST has given a major boost to the leasing industry, signalling a movement towards a more mature financing market. Reduction in the GST rate for construction equipment from 28 per cent to 18 per cent will also push equipment sales in the future. Another important reform was the introduction of the Insolvency and Bankruptcy Code. The new framework has made resolution of stressed assets a time-bound process unlike earlier when it resulted in interminable delays in the courts. The government has also passed many laws and formulated policies pertaining to arbitration, coal linkage, easing of FDI norms, etc. These have already started showing positive outcomes on the ground, especially because the intention is to create a conducive business environment. All this bodes well for the infrastructure sector, and in turn, for the equipment market.