CE financing has definitely picked up and has registered a growth of 20 per cent over last year. Though the industry has not touched the peak levels of 2007-08, it expects to end the 4th quarter on a high and continue the growth story in 2011-12. Equipment India finds out the details.A round five months ago, when Equipment India brought out an exclusive story on the construction equipment financing segment with detailed inputs from some of the major players in the market, the market size arrived at was around Rs 14,000-15,000 crore, whereas today, the figure hovers around at Rs 18,000 - 20,000 crore. Says Pratap Paode, Chief Executive Officer, Shriram Equipment Finance Company, "Markets started their downward journey in late 2008 (calendar year) and were at their worst levels by Dec-08/Jan-09. However, the recovery started in July/August 2009 and thereafter there has been visible growth of around 15-20 per cent MoM in terms of number of new equipment sold. Jan-March 2010 was one of the best quarters witnessed by the industry in terms of recovery from bottomed out volumes and absolute units sold. The good part is that the growth sustained throughout this financial year so far and the market size expected this year will certainly exceed by 10-15 per cent as that of FY 07-08."Paode adds, "As finance volumes and performance of portfolio is a direct function of industry growth and opportunities for asset deployment, the outlook is positive. We at Shriram are optimistic of the fact that the construction equipment industry will be able to maintain a healthy growth rate of 15 per cent YoY for next 5 years at least. This does corroborate with infrastructure investment plan in XIIth plan i.e. 2012-2017."Pointing out the total size and value of the market, including new equipment, imported equipment, and used equipment, KV Srinivasan, Chief Executive Officer, Reliance Capital says, "It is difficult to estimate the actual size of the market since in CE, unlike the SIAM, there is no agency which aggregates the sales volume of all CE manufacturers. Also, the construction equipment manufacturers are largely diversified and segregated between standard and non standard assets. However the market size can be fairly estimated between Rs 33K-35K crore on the standard assets side. Non- standard can be estimated to be of same size as the standard assets. It may not be possible to clearly spell out the imported equipment market size."Says Srinvasan, "Lease is quite prominent in the international markets. In India this hasn't caught up yet with the international trend. Loans have a relatively much higher penetration here. But there have been some players actively trying to create a bigger market for lease in India. Also, internationally the manufacturers have their captive finance companies, but here in India finance is mostly taken care of by domestic NBFCs and Banks."Admittedly, India's per capita number of machines is abysmally low at 13 machines per million, compared to 396 in the US and 96 in China. As financing is the key for such growth, the industry foresee a massive growth in the coming years. "Financing has definitely picked up and we seeing a growth of 20 per cent over last year already. We are yet to touch the peak levels of 2007-08 however the industry expects to end the 4th quarter on a high and continue the growth story in 2011-12. Magma is present across segments i.e., from first- time buyers to strategic customers and across geographies. We are thus extremely well placed to take advantage of the growth expected and clock high numbers in the coming months," points out Sumit Mukherjee, Vice President, Magma Fincorp. He further adds, "Our estimate is that the market size is around 20,000 crore. We are expecting a 20 per cent growth this year and 30 per cent in the next year."Today, as the construction equipment market is back on track new players are eyeing the market which means tougher competition as well as more innovative products. The large, consistent and long-term players always meet new competitors by sticking to their own strengths and clear strategies. Customer management has become the most crucial factor for manufacturers as well as financiers. "The industry has already moved towards that with AMC and registration cost being added to the price of the asset. However there is much that can be done on this but it would take some more time for this to evolve," says Sumit Mukherjee."Mining and construction equipment being very expensive, about 85 per cent of the product purchase is being financed," points out DK Vyas, Chief Executive Officer, Srei Equipment Finance. "Manufacturers need to keep this fact in mind that almost 80 per cent of the MCE customers are micro, small and medium enterprise players. The big project developers usually sub-contract their work to these entrepreneurs who are spread throughout the length and breadth of the country. It is these MSME players who form the backbone of the India growth story, and these players are extremely price and value-focused players," Vyas explains. According to Sharma, "The industry has already moved towards affordable financing systems with AMC and registration cost being added to the price of the asset. However there is much that can be done on this but it would take some more time for this to evolve."Talking about the financing of used equipment, Srinivasan says, "Used equipment financing hasn't picked up the way used cars or used CV has. This is primarily due to the fact that the secondary market is very shallow. Also since the life of these machines is high, the ownership remains with the primary buyer for a longer period. Standardisation of prices for second hand machines is a big challenge. Refinancing is prevalent but used equipment purchase financing has a long way to go. There have been certain initiatives by some manufacturers on buy back and selling refurbished assets but the volumes are yet to pick up."He further adds, "Not a very large number of equipment are imported by Indian customers, since either the domestic manufacturers are able to provide equally good machines, or these foreign manufacturers have set up their plants here in India. However we feel there are no challenges as such in financing imported equipments since only a corporate customer would buy such machines and here the call is largely enterprise based. Of course reputation and ethical standards of the customer would need to be assessed while taking the decision."According to Shrivasan, "A high sea sale generally happens when manufacturer or sellers representative office is available in India. In this method, the payment on import transaction takes place even before the asset and documents reaches Indian port, ie when the machine is still in shipment between exporting country and importing country. These transactions are exempted from Central Sales Tax. "Letter of credit" (known as LC) is an undertaking issued by the importer's bank to seller/exporter bank to the value of asset or loan amount. The machine is dispatched by exporter on receipt of Letter of Credit by his banker. The issuing banker will honor the LC on receipt of machine and all related document at Indian port. The Indian import market operates roughly 70 per cent on high sea sale transaction and 30 per cent through LC method."Says Paode while speaking about NPAs, "It will be unfair to make a statement that NPAs primarily come from small and midsized customers. Most finance companies have witnessed NPAs coming from large- sized customers also either due to operational issues or over leveraged position. While it is true that the endurance capacity of small customer is low who works on wafer thin working capital / cash in hand position, the risk from the lenders perspective is granular and distributed. We do have products wherein we can take care of short term or incidental cash requirements of the customer who then can continue to operate with financial discipline even in case of payment or contract adversities."Mukherjee points out, "We have a structured lending programme with well defined customer selection criteria and offerings for each distinct segment. These selection criteria have evolved over a period of time and gets further defined with lessons learnt and change in external environment. All customers from the first time buyer to SME, mid- tier and strategic would need to pass through these filters, This enables us to offer as per the customers size and thus keep our NPA well within acceptable loss norms."Speaking about competition Mukherjee says, "In a commodity scenario the differentiator will be speed of service and reach. With 170 branches we are well placed to address the entire market segment. Our success has been largely due to a combination of factors like speed, superior customer support and deeper reach and we believe these will continue to yield results for us."Pointing out the risk factors in CE financing, Srinivasan says, "While financing an individual customer you need to take into account the experience the client brings in running the equipment and his ability to deploy it for work. Since these customers generally do not have working capital limits from banks generating enough work to be able to meet the EMI obligations and viability of the machine is critical."He adds, "While assessing a corporate customer, you look at his financials, his unexecuted work order book, his cash flows and financial ratio's like D:E, DSCR, fixed assets to turnover, interest coverage, etc. Since the exposures are large you also tend to look his past servicing of high ticket loans. The most important parameter considered while appraising either an individual or a corporate client is his ability and intentions to pay back." Clearly the risk of non-completion of a project/non- realisation of the funds is a major risk in any project. Any being depreciable assets, construction equipment do carry a normal asset risk of wear and tear and obsolescence. We try to mitigate this risk by assessing the customers' track record, capacity and financial standing and by factoring in the asset depreciation while offering finance."Mukherjee sums up, "We expect that roads and mining to be the major drivers of our business in this fiscal as well as the next fiscal. Magma has been on a growth curve since August 2009 and during the first half of the current fiscal, the company's disbursements in all products have grown over 30 per cent. The company is quite hopeful of maintaining the momentum and end the year on a high note. The growth that we are seeing in the industry is only the tip of the iceberg, structural and bottleneck is slowing down growth. For example the desire to execute 20 kms of roads a day is nowhere near reality. I would suggest the government sets up one window clearance for projects. This, I am sure, would substantially speed up project execution."