D K Vyas, Chief Executive Officer, Srei Equipment Finance.
Once investments in infrastructure pick up and more end-user industries start using ICE assets, the industry will mature.
The growth of the infrastructure and construction equipment (ICE) industry in India is still at a nascent stage. The industry is currently at about $4 billion with volumes in the vicinity of 80,000 units per annum in the organised market. The moderation in the growth of our GDP during the last couple of years has impacted the growth of ICE industry, too. However, my firm belief is that growth will pick up in FY15 and with that, the prospects of ICE industry will also start looking up.
Going forward, the two main demand drivers will be infrastructure and urbanisation. Anticipating the demand for ICE that will be unleashed, there is a growing domestic base of infrastructure equipment manufacturing. In addition, many global original equipment manufacturers (OEMs) are also setting up manufacturing base in India; some are even bringing in their financing arms to India. Thus, long-term growth of the ICE market in India is guaranteed, despite some moderation in the short to medium term.
The growing role of private sector in infrastructure creation is another factor that will fuel ICE demand. Almost 50 per cent of the $1 trillion investments envisaged for infrastructure during the 12th Five Year Plan (2012-17) is to come from the private sector. Being high value assets in India, outright procurement of ICE is usually a government practice. Most private parties get almost 80 per cent of the asset value financed. Thus, with growing private sector participation, ICE financing is also poised for robust growth along with the ICE industry.
As per a study by A T Kearney, the ICE industry is expected to attain a size of over $20 billion by 2020.
The Indian infrastructure sector is dotted with thousands of small-time entrepreneurs providing services like construction, transportation, etc, and operating in the remotest corners of the country. It is the usual practice that once a big project is awarded to a developer, the same work is sub-contracted in parcels to these smaller players. These players, who are extremely price and value- sensitive, then acquire ICE assets on debt/lease for executing their contracts. Financial instruments like leasing and rentals are tailor-made for their needs.
Leasing has proved to be the most potent and cost-effective form of capital creation worldwide. Renting is another viable option for them as the fast pace of technological progress is leading to the gradual shrinking of the utility life of machines. In fact, renting makes all the more sense if the entrepreneur has to use any machine for a limited period. Used equipment also has tremendous potential. But with no mechanism for registration of ICE assets in India, an organised trading platform for used equipment is yet to develop.
I feel that, going forward, these trends will become more prominent as users become more aware of the attendant benefits. Once a trading platform for used machines is in place, this sector will also become more organised.
The small-time entrepreneurs essentially rely on NBFCs for their credit needs as they usually are unable to access institutional financing like banks. These NBFCs, familiar with the businesses of these players and having a decent understanding of their needs and also their capability, take a call on extending credit to these players based on their track records, order books, likely cash flow and a host of other factors. In addition, many of these NBFCs even guide their customers, educating them on the type of machines that would suit their needs, the tenure for which they would need those and also what mode of procurement would be ideal for them. Such advice by NBFCs is a huge value addition for such players, especially first-time users (FTUs).
The ICE industry faces several challenges in terms of taxation issues as well as regulatory issues:
The Indian ICE industry is on a learning curve. Once investments in infrastructure pick up and more end-user industries start using ICE assets, the industry will mature. At this stage, the ICE financiers and the OEMs need to work together in intensifying the dialogue process with the government authorities and increase users' awareness. Once users and policy-makers wake up to the various advantages of the financial tools, this industry as also the ICE financing industry, will experience exponential growth.
Once users and policy-makers wake up to the various advantages of the financial tools, this industry and also the ICE financing industry will experience exponential growth.