After registering robust demand growth in the past three to four years, demand for construction equipment in 2018-19 was subdued due to the economic slowdown, the Infrastructure Leasing & Financial Services (IL&FS) crisis and the liquidity crunch. This has hit the equipment rental and leasing market as well. Unlike developed countries such as the US, Japan and China, the rental and leasing market for construction equipment is still in a nascent stage in India. According to the Construction Equipment Rental Association (CERA), the market penetration of the construction equipment rental industry is only 7 per cent as compared to 65 per cent in Japan and 55 per cent in the US. At present, key equipment in the rental fleet in India comprises backhoe loaders, excavators and mobile cranes. With cost benefits such as low procurement costs, the rental and leasing market is expected to gain huge traction in the country.
Current scenario
Currently, two types of rental models exist – dry and wet rentals. Dry rental is not very prevalent in India unlike in Western countries. This model gives control of the equipment in the hands of the lessee, and it has been observed that the equipment is not used and maintained as per standards, and consequently, the equipment’s lifespan gets reduced. The wet rental model is highly prevalent in India as the equipment is under the control of the rental company in terms of operations and maintenance (O&M).
The heavy equipment rental business in the country has been facing various challenges such as non-availability of new machines on rent, rentals mostly restricted to low- to medium-value equipment and general purpose equipment, low availability of technologically advanced equipment on rent, current rental players having a limited service offering, and shortage of skilled technicians to operate and maintain the rental fleet.
The construction equipment rental industry is also facing issues of delayed or stuck payments, lack of standardised practices, non-uniform entry tax in different states, etc. The recent fall of major construction players such as IL&FS and ERA Infra Engineering, and the failure of many projects awarded under the hybrid annuity model (HAM) to achieve financial closure have been a setback too. Due to the issues of goods and services tax (GST) input, construction companies are themselves buying the equipment, due to which equipment lessors have been hit quite badly.
The economic slowdown is another deterrent creating impediments in payment recovery. This has reportedly affected expansion plans of construction companies as purchase of new machines has gone down by 30-40 per cent.
These issues notwithstanding, India is emerging as a key international market for equipment rentals. The rental business has become one of the leading end-use markets for construction equipment. The rental market is especially expected to pick up in Tier II and Tier III cities with demand coming from small and medium-scale contractors.
When compared to developed countries, the domestic rental construction equipment industry is very small, highly unorganised, fragmented, and mostly dominated by small and regional rental companies/third-party rental companies. Due to this, equipment rental yields are much lower than in other developed countries, making it tougher for larger players to grow and sustain the business. However, with big players in the industry opting for offering rental services to construction companies, the market is gradually witnessing original equipment manufacturers (OEMs) gaining presence.
Key recommendations
As per CERA, there is an immediate need to form a legislation to prevent theft, detention of equipment and delayed payments. Operator training is also required due to rampant poaching of operators, especially in the piling equipment industry. Some of the key recommendations are:
- Devising new models of hiring that will be beneficial to both the lessors and other construction stakeholders.
- Strengthening relationships among all the stakeholders such as lessors, project owners, equipment manufacturers and financiers.
- Standardising equipment rental rates, operating procedures, work orders and payment recovery.
- Improving rental yields and offering better O&M support to maximise the productivity of rental machines.
Outlook
As India is projected to be among the top countries for infrastructure development and construction, there will be ample opportunities for growth. Further, in the backdrop of the crisis in the non-banking financial company segment, the government plans to arrange construction equipment and machinery from manufacturers on a lease basis with the central and state governments extending guarantees. The equipment rental market is set to grow rapidly in the coming years due to increase in infrastructure spending and the need for faster execution of projects. However, the short-term business outlook seems to be bleak given the sluggish pace of economic growth.