Is the money flowing again?
Tricky times call for strong strategies but the long term prospects are bright for financiers with staying capacity, finds Charu Bahri.

Demand for construction equipment finance has been down for the last few years. But the industry remains positive about the long term prospects and affirms things have started looking up since the new government took over.

Looking up
Research company RNCOS estimates the construction equipment finance market was worth Rs 20,500 crore in 2013, and will grow at a CAGR of 21 per cent through to 2018. It also says around 85 per cent of mining and construction equipment sales are financed.

?Commercial vehicles and heavy commercial vehicles sales in August were up 8.6 per cent, the first increase in 17 months, and 23 per cent, a three-year high, respectively. These figures augur well for the infrastructure sector,? observes DK Vyas, Chief Executive Officer, Srei BNP Paribas.

?In recent months, the month-on-month demand for finance has grown for backhoe loaders and excavators. We are also seeing good demand from mining and heavy cranes segment. However, cash flow problems and the lack of new projects are still affecting the industry,? opines Vinod Chauhan, Executive Vice President, Kotak Mahindra Bank.

Government measures to spur infrastructure creation are expected to further improve the situation on the ground. In particular, industry expects initiatives by the new government on mining to have a strong and positive impact.

?I expect activity to start post the monsoon, to boost equipment sales from October 2015 onwards. I foresee 10-15 per cent growth in the sale of heavy equipment post November 2015, mainly from mining companies,? opines Anand Date, Vice President, Onicra Credit Rating Agency of India Ltd.

Somasekhar Vemuri, Senior Director, Crisil Ratings, expects steps taken by the government to revive investment demand will boost prospects over the medium term. ?Roads, railways and urban infrastructure segments may witness better growth, and hence exhibit more demand for finance. Heavyweights such as power and oil and gas will await the turn of the investment cycle,? he says. Vyas is hopeful that the Central Government will lay out non-negotiable land and environment policies and based on that, empower each state to frame their own policies to boost infrastructure development.

Industry shake-up
It?s been hard going for banks and financial institutions through the protracted slowdown. ?Banks especially have suffered due to their exposure to mining and the power sector,? says Date. Because of that, he strongly feels banks will continue to be in wait and watch mode. ?NBFCs are likely to be first off the block in equipment financing,? he adds.

Tough times cause some restructuring and last year has been no different. Construction equipment finance has seen some exits. Bajaj Finance bowed out of the segment, citing muted profitability due to low average ticket sizes and higher non-performing assets in the construction equipment segment than overall-4.5 per cent versus 1.13 per cent-as reasons for its departure. Certainly, construction equipment financing can be risky business but some specialists are doing well. ?Our share of NPAs has been less than the rest of the industry because we consciously cut down on disbursements and strictly monitored asset quality. We tried to accommodate our existing customers by rescheduling their payment cycle. Also, it helped that we are present in other asset classes like agriculture, healthcare, and IT,? says Vyas.

?NPAs have seen an increasing trend in the last two years due to the industry slowdown. But things are stabilising now, even marginally improving. Overall, our delinquency is less than one per cent, which is the best in the industry in the current market,? shares Anirudh Singh, Country Manager, Terex Financial Services India.

Broad-based recovery, however, hinges on a significant improvement in investment demand and the government?s ability to continue to push economic reforms. Vemuri says, ?The enormous debt on the balance-sheets of highly leveraged large-sized firm-most of which have linkages to the infrastructure sector-doesn?t help. In the second half of FY15, Crisil downgraded 466 firms; investment-linked sectors such as capital goods, construction, engineering, steel and real estate continued to witness credit quality pressures. Almost 60 per cent of these downgrades were attributable to weak liquidity.?

Vemuri expects advances in the current fiscal to grow only marginally vis-a-vis the estimated 11 per cent last year, given the low level of capital expenditure planned by private corporate sector. A positive is regulatory initiatives allowing banks to lend longer-term loans to existing and new projects in core industries like infrastructure, with periodic refinancing-this is expected to reduce pressure on borrower?s cash flows.

End-to-end solutions
Whereas NBFCs and banks used to be the go-to options in the market, buyers of some branded equipment-like Terex and Mahindra-are opting to get their acquisitions financed by the vendors? finance arms.

With Terex Financial Services, Terex is providing customers with a full solution on one table.

According to Singh, ?Having a dedicated team to provision finance, a value added service, make a huge difference to customers. Our team understands the business requirements of each customer and thereafter suggests a personalised solution, which may be a loan/lease option/rental or External Commercial Borrowing (ECB). They establish a closer rapport with customers than banks and NBFCs can achieve. We offer long-term as well as short-term finance. We try to provide extra subsidies in terms of interest rate to customers-on a case-by-case basis. Customers also get the assurance of extended support from Terex throughout the lifecycle of equipment.?

What sort of financiers do borrowers prefer?
According to Anjan Guha, President, Plant & Machinery, Capacite Infra Project Ltd, ?NBFCs are a second choice to banks, their terms aren?t as favourable. Financing arms of vendors are only useful for companies patronising those brands.?

?We are comfortable working with all kinds of lenders-banks, NBFCs and the financing arms of equipment companies. The latter can help the process run faster, but one still must negotiate rates,? says Paresh Mehta, CFO, Ashoka Buildcon. ?We prefer to go for other than vendor finance so as to get a third opinion on the feasibility of buying/operating the equipment,? shares G Boopathi, Manager Civil, Technology Competency Centre, Heavy Civil Infrastructure IC, Larsen & Toubro Ltd. ?We are open to finance from any bank, NBFC or other kind of financier. We evaluate the rate, tenure and other terms like restrictions on the use of finance to identify the best source,? adds Samar Ghoshdastidar, Technical Director, Simplex Infrastructures Ltd.

Tie-ups galore
Several equipment companies such as Volvo India, Caterpillar India and JCB have entered into agreements with banks and NBFCs to support sales.

According to Amit Gossain, Executive Vice President - Sales, Marketing and Business Development, JCB India Ltd, ?It makes sense to work with both banks and NBFCs to get clients the best possible asset financing solutions. We recognise both these financing routes at par and value all our associations with financiers and banks.?

Another sort of useful tie-up is one between equipment financing e-commerce companies and financiers. Services like allow potential borrowers to comparatively review offers from financiers-both NBFCs and banks. ?We have entered into agreements with certain financiers to offer our clients better overall value,? says Bhushan Kanherikar, General Manager - Business Development, Machine

Finance for seconds
With markets being down, it comes as no surprise that demand for finance for second-hand equipment has been growing.

?Used construction equipment financing is an emerging trend,? says Shushmul Maheshwari, CEO, RNCOS. ?Much of the used equipment in the market costs around half of new equipment, and hence enjoys growing demand. So far mostly unorganised players have tapped this market, but now the largest financing player Srei BNP Paribas has started catering to this segment. I expect more organised players to come forward and tap the segment with lucrative schemes,? he adds.

Leasing route
Given the policy framework within which construction equipment finance companies function, loan financing has been the principal vehicle so far. Leasing simply hasn?t taken off as yet.

?India is yet to tune in to leasing options,? observes Chauhan, and explains why, ?Issues currently inhibiting equipment leasing are interstate tax on the movement of assets and tax at the time of lease closure. But leasing is expected to grow if large construction companies opt for it to avoid leveraging their balance sheets.? ?What would help leasing take off in India is the prompt availability of a pool of quality assets. We rely on leasing only for peak period items at present because we want complete control over assets to deliver our construction commitments. We still see some uncertainty in the availability of equipment on lease,? says Mehta. He adds, ?Leasing is a good option because it keeps the balance sheet light and helps properly define the operating cost, which depreciation can otherwise impact differently year on year.?

?The lack of clear policies on leasing has led to the application of both service tax and VAT on the same transaction, which has in turn eroded the economic advantage of leasing for price sensitive infra players. That said: worldwide, leasing has been empirically proven a cost-competitive tool for capital creation,? adds Vyas, who is hopeful that the industry will come together to create awareness about the benefits of leasing at policy making levels.

Hopefully, it will.

  • Construction equipment finance market: To grow at a CAGR of 21 per cent through to 2018.
  • Eighty five per cent of mining and construction equipment sales are financed.
  • In demand: Backhoe loaders, excavators, mining and heavy crane segment.
  • Equipment players enter into agreements with banks and NBFCs to support sales.

Wishlist of NFBCs
NFBCs have been the mainstay of construction equipment financing in India. DK Vyas, Chief Executive Officer, Srei BNP Paribas, elucidates what would help them play their part better:

?We need a clear taxation structure. Rolling out a uniform GST would bring in clarity on the indirect tax front. To mobilise more resources, NBFC-Asset Finance Companies should be allowed to use the external commercial borrowing (ECB) window for financing of domestic equipment. NBFC-AFCs are presently allowed to use ECBs only for financing leases of imported equipment. Banks are more empowered than NBFCs for asset recovery. NBFCs should also be empowered to avail services of SARFAESI and DRTs.?

Interest rates: Which way will they move?
?The way global commodity prices and inflation at home are moving downward, a cut in interest rate is likely in the near future,? says DK Vyas, Chief Executive Officer, Srei BNP Paribas.

?Based on the current market, any rate change looks a little difficult. While industry sentiment is becoming positive, things on the ground have yet to improve-demand, project implementation, cash flow and delinquency,? says Anirudh Singh, Country Manager, Terex Financial Services India.

Borrower voices
What do borrowers think about today?s market-is finance easy to come by? Paresh Mehta, CFO, Ashoka Buildcon, says, ?Equipment finance is forthcoming albeit lenders are carefully reviewing the profile of borrowers/company ratings. It helps that finance for one equipment is usually a small sum. Getting finance for a pool of equipment is more challenging.?

?If the buyer?s track record is fine, there?s no hardship in obtaining finance,? says G Boopathi, Manager Civil, Technology Competency Centre, Heavy Civil Infrastructure IC, Larsen & Toubro Ltd. That said, he believes: ?It would help the industry if equipment finance covers services and spares associated with equipment, and even working capital associated with operating new equipment.? ?Finance is challenging to arrange in today?s market. It isn?t a case-by-case experience, the market as a whole is finding it hard to come by finance. Demand for finance exists, but banks have become over cautious,? says Anjan Guha, President, Plant & Machinery, Capacite Infra Project Ltd.

?A company with the size of Simplex experiences no challenges in raising finance for equipment. But this may depend on the profile of the company,? says Samar Ghoshdastidar, Technical Director, Simplex Infrastructures Ltd.