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Construction : Feature | August 2017 | Source : Equipment India

Equipment Finance Sets to Outperform

Growing requirement for construction equipment in the wake of more construction projects is expected to drive the need for equipment finance.

Construction equipment market in India has evolved and become a major one in the global market place. With the evolution of the market, awareness about the various equipment class and their use, and above all, the construction and infrastructure development activities picking up momentum, the equipment finance market has opened up to all equipment categories. Even rental and auctioning cover equipment financing now as a lot of equipment at work are coming through rental and auction. 'A well-developed infrastructure is a foundation for growth in any country, paving the way for a better quality of life and a rapid rise in gross domestic product (GDP), especially for developing countries like India. Due to great emphasis on the infrastructure, construction and mining sector in the country, construction equipment segment has become one of the fastest growing segments of the industry,' says Sameer Malhotra, CEO, Shriram Automall.

Strong market
According to Devendra Kumar Vyas, CEO, Srei Equipment Finance Ltd, the outlook for the equipment finance sector is strong. He elaborates, 'For this budget, the government has again given a massive boost to the infra sector with an unprecedented outlay of Rs 3.96 lakh crore. The allocation for roads and highways increased by 12 per cent to Rs 64,900 crore. Highway construction accelerated to an all-time high pace of 25 km per day in Q1 FY 2018 as compared to the 22 km per day in FY2017 and about 16-17 km per day in FY2016. The government has set targets to award contracts for 55,000 km of highways in the next two years. Besides the road sector, the government's thrust on railways, irrigation and contract mining is expected to boost country's infrastructure development. In 2015, the railway ministry had outlined an ambitious target of investments amounting to Rs 8.5 trillion by 2020 û considerable portion of which pertains to network expansion. With opportunities in the infrastructure space on the rise, demand for equipment has picked up significantly. The infrastructure equipment market grew by 30-35 per cent in 2016-17 (unit sales). Over the next few years we should see the sales of equipment sector maintaining a growth of 20-25 per cent CAGR.'

On the equipment market trend, Vyas points out, 'For FY17, the total construction and mining equipment market is expected to be around 70,000 units. As per Feedback ICEMA Report on Revival of the Indian Construction Equipment Industry, equipment sales are expected to reach around 1,20,000 units by 2020.'

'The demand for infrastructure equipment is picking up due to commissioning of some of the major private and public sector infrastructure projects. The growth is expected to remain strong in the near future, aided by increase in spending by the government on infrastructure and continued reforms,' says Shantanu Padhye, Business Head - Commercial Vehicle & Construction Equipment Loans, Mahindra & Mahindra Financial Services Ltd.

On the construction equipment market, Malhotra highlights, 'By FY19-20, construction equipment industry's revenue is estimated to reach to $ 5 billion. Revenues have increased at a CAGR of 8.38 per cent during FY07-14 and are further estimated to grow at a CAGR of 2.34 per cent between FY07-20 due to rapid infrastructure development, undertaken by the Government of India. Sale of construction equipment in India is estimated to grow at a CAGR of 6.18 per cent, in terms of volume, and reach to 96,700 units by FY18.

Financing scenario
There was a time when finance was available for only a few selected types of construction equipment which were largely in use such as backhoe loaders and excavators. But now with the market has evolved and the awareness level has gone up, finance is available for almost all types of equipment.

Says Vyas, 'We provide financing solutions for new as well as pre-owned equipment, for a wide range of construction and mining equipment such as earthmoving equipment (excavators, backhoe loaders, dozers etc), material handling equipment (crawler cranes, tower cranes, telescopic cranes etc), road construction equipment hot-mix plants, pavers, compactors etc), concreting equipment (transit mixers, concrete pumps, placer booms etc), and material processing equipment (crushers, screens etc). These products are widely used in industries such as road construction, mining, power generation, irrigation, highway development, transportation (ports and railways) and urban infrastructure projects.'

He further adds, 'We also provide financing for a wide range of logistics and warehousing equipment such as reach stacker, forklift, commercial passenger and goods vehicles across the four sub-segments of the commercial vehicle industry in India including trucks, tippers, and trailers, provided the end-use of the asset acquired by customers is for an income-generating purpose. In agricultural sector, we finance equipment like tractors, harvesters etc and also allied equipment like chilling plants, cold storage and irrigation equipment etc. We also provide financing solutions for logistics and material handling equipment like rigid multi-axle trucks, tractor-trailers, etc.'

Padhye adds, 'We have a business relationship with most of the major infrastructure equipment OEMs in the country, and finance most of the standard equipment sold by them.'

Products and schemes
Equipment finance players have come out with various schemes that suit different types of customers according to their requirements. According to Vyas, as the largest financiers of equipment in India, Srei provides financing to a wide spectrum of assets which includes construction and mining equipment, IT infra equipment, healthcare equipment, farm equipment and pre-owned construction equipment. He elaborates on various schemes from the company, 'We are also the pioneers of equipment leasing in India. Leasing equipment enables our customers to use the latest product available all the while avoiding extravagant costs. We pioneered several innovative products like a reverse auction of interest rates, which allowed our customers to become the price makers by bidding for the lowest rate for loans. A monsoon special scheme offering attractive terms and deals in collaboration with our manufacturer partners including longer tenure of loans and reduced EMIs during monsoon months; Asset Power - a unique loyalty program in collaboration with some of our global manufacturer partners where we offered preferred customer benefits. To promote leasing, we organise a unique auction of rentals where we lease out select equipment to our customers at monthly rentals which are decided by reverse bidding.'

Padhye informs, 'Our finance schemes are customsied basis the asset being financed as well as changing needs of customers. This customisation gives us an edge over others.'

Choosing a customer
It is imperative to evaluate the customer and the equipment to be financed, before finalising and disbursing the amount. Financing is an area where a lot of unpredicted risks involved due to defaulting in repayment and non-performing assets. Every financier is focused on the preliminary criteria of selecting a customer which include viability of project, type of equipment used, ability to repay the loan, and seriousness of the customer on executing the project.

Vyas elaborates, 'We do evaluate the asset prior to financing. However, it is not feasible here to describe our credit and risk evaluation processes which we thoroughly follow. If it is a new standard asset, like a backhoe loader or an excavator from a renowned OEM, then we consider the invoice value as the sale price. However, we safeguard our exposure defining the maximum limit depending on our past loss experiences of a specific asset of a specific manufacturer. For non-standard equipment, we are always conservative since they have deployment or resale limitations. Additionally, while refinancing an existing asset or financing a pre-owned asset, we always depend on our internal and detailed valuations. Subsequent to the disbursement of debt, we continue to monitor the development and performance of the relevant project or asset.'

According to Padhye, some of the key criteria for deciding whether to finance a customer, would be aspects like his credit history, projects in hand, current liability levels, business track record, clients, references etc. The commercial feasibility of the project and the repayment capability of the prospective customer are also key aspects taken into consideration.

Financing FTUs and FTBs
Financing to first-time users (FTUs) and first-time buyers (FTBs) is a risky affair considering the fact that there is no track record or history of repayment. However, many banks and financial institutions do finance to FTUs and FTBs after a thorough analysis of his knowledge about the project and equipment which he is involved with. Says Vyas, 'In fact, we initiate FTUs and FTBs into becoming entrepreneurs and further nurture them into becoming fleet owners and so on. Our used equipment financing benefits the FTUs and FTBs of equipment who often face challenges of expensive equipment and availability of funding. Our understanding of the market allows us to help our customers to network and productively deploy the idle equipment by sub-contracting to a larger customer in times of distress.'

Financing used equipment
When it comes to financing used equipment, the major factor will be definitely the age of equipment and its ability to perform jobs without any technical issues. According to Malhotra, 'As we know the ratio between the sale of new and pre-owned equipment is 1:1, SAMIL has become the largest player and first choice of the market through their huge inventory, providing a number of used equipment in good quality and at optimal rates.'

Vyas explains, 'The used equipment market in the country is still in a nascent stage. To address this, Srei created a new financing vertical for pre-owned equipment, perhaps the first such offering in the industry, which created an ecosystem of first-time users and first-time buyers of equipment who often faced challenges of expensive equipment and availability of funding.'

He further adds, 'To develop the pre-owned market, we have leveraged technology in creating platforms which act as market places for the used (as well as new) equipment financing. We have Live and Online Auction platforms; again an industry-first in the Indian context. Live Auctions, besides providing physical access to equipment, enable the customer to view the photographs and specifications of the equipment displayed at other yards/site pan India. Online Auctions are held on digital platform which can be accessed by desktops as well as mobile devices. We have also launched the first of its kind æauction exchange platform' called æSmart Exchange Finance', which enables equipment owners to exchange their old equipment for new ones.'

Malhotra elaborates, 'For refinancing of pre-owned construction equipment, there are a large number of options available from leading banks to finance houses. Shriram Automall being a 100 per cent subsidiary of Shriram Transport Finance Company (STFC), the largest asset financing NBFC in India, offers its customers finance option through STFC. It has a network of 853 branch offices and 803 rural centres. Shriram Automall with STFC's significant presence in financial services understands that acquiring used heavy machinery at once is not always affordable or convenient, thereby we view financing scenario in rentals a privileged facility for many. Rentals have flourished in recent years. The rental business in its present state is somewhat a new way to utilise equipment and control costs. For many rental equipment company owners acquiring equipment on finance, plays the major role as it helps them show a reasonable bottom line profit and still see their cash balances (EMI) getting smaller each month.'

He further adds, 'STFC, being the parent company of SAMIL, provides equipment finance to all major contractors and rental companies through its various outlets. By providing equipment finance option, the company is presently serving many specialised as well as general equipment rental companies.'

Financing in rental/leasing
Rental and leasing is still a low-key affair in Indian market compared to developed western markets. However, with the presence of a few organised players and an increased construction activities of big ticket projects, the rental market is slowly picking up. Says Vyas, 'There is a huge potential for equipment leasing and renting in the country. Despite being amongst the top 10 economies, the Indian leasing volume is less than 3 per cent of global volumes. We are ranked outside the top 50 nations while our BRICS peer are all within top 20 in leasing. The penetration of leasing in the country is also low at less than 3 per cent. Worldwide leasing has emerged as an important tool for asset creation.

The US, China, Germany and the UK combined account for 60 per cent of the worldwide annual leasing volumes.'

He elaborates on the advantages, 'Unlike an outright purchase, leasing does not require any upfront capital outlay. The down payment requirements are often lower compared to a typical loan. Lease allows to craft out real distinctions between the benefits of ownership and the benefits of use. Slowdown in demand in the past and sluggish project execution has affected the cash flows and the financial risk profiles of many infrastructure companies. The stress is visible on their balance sheets in terms of high leverage and weak debt protection metrics. Leasing acts as a vital tool for asset creation as it allows the companies to use equipment without leveraging. Recently, we also launched iQuippo, a unique digital marketplace to sell or lease infra equipment. The platform allows buyers and sellers to interact, negotiate and close transactions in a timely, transparent and cost-effective manner.'

Market outlook
The equipment finance market in India is growing, with many banks and non-banking financial institutions (NBFCs) entering the market in a big way. While leading equipment financiers such as Srei, Sundaram Finance, etc are continuing their growth prospects, many banks have made inroads with their presence felt in the last couple of years. Vyas explains, 'We are the largest financiers of construction and mining equipment financing and leasing in India. We have a market size of about 30 per cent in construction equipment financing and presence in 89 locations across 21 states.'

He adds, 'The past few quarters have witnessed a slew of reformative actions by the government, especially in the road and power segment, which have given the much needed impetus to the industry.' Srei Equipment Finance Ltd has disbursed Rs 11,715 crore for the year ended March 31, 2017 as compared to Rs 9,158 crore during the corresponding previous year; registering a growth of 28 per cent. The gross NPA reduced from 2.80 per cent (March 31, 2016) to 2.38 per cent (March 31, 2017), while net NPA reduced from 1.90 per cent (March 31, 2016) to 1.70 per cent (March 31, 2017). Total AUM stood at Rs 21,623 crore as on March 31, 2017, as compared to Rs 19,138 crore as on March 31, 2016.

With the increasing construction activities and an expected induction of more equipment into the market, there is a spurt in requirement of financing expected in the coming years. Says Padhye, 'Some challenges that we face are incremental finance needs of rapidly growing clients, and expectation of aggressive internal rate of returns (IRRs). In such cases, the financier has to carefully balance growth and the amount of exposure being taken.'

Going forward, it is for sure that equipment finance can be a major component in the overall growth of infrastructure development. Once the projects take of without much of a delay and funds flow into the system, increased and smooth activity of construction can be anticipated. While financing to corporate and existing contractors can further improve their track record, financing to FTBs and FTUs can create more entrepreneurs in future.

- Sudheer Vathiyath

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