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BW Businessworld

When The Used Trumps New

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The Indian economy is no longer trapped in the Hindu rate of growth. In the past six years, India's GDP growth averaged more than 8.5 per cent annually. However, this looks unsustainable if there is no urgent capacity addition to India's infrastructure. Realising this, policy makers have come up with an ambitious infrastructure investment target of $1 trillion during the 12th Plan. Thus, for at least the next couple of decades, India's infrastructure sector is bound to enjoy the spotlight.

A direct beneficiary of this boom will be the infrastructure and construction equipment (ICE) industry. It has seen compounded annual growth of about 30 per cent since 2003-04. We follow a simple thumb rule. The growth rate of a country's infrastructure is usually two to three times its GDP growth rate. And the growth rate of the ICE sector would be 1.3 times that of the growth rate of the infrastructure sector.

Lured by the opportunity, many global original equipment manufacturers (OEMs) are making a beeline to India. But despite the presence of over 200 ICE players, volumes are only about 50,000 units per annum in the $4.5-billion organised market. India's per capita number of ICE is just 13 units per million, compared to 396 in the US and 96 in China.

Nearly 80-85 per cent of ICE is financed, mostly by SMEs, who rely more on asset financing companies (AFCs) as they do not have easy access to institutional finance (banks). The AFCs have grass-root knowledge of the credit needs, cash flow and capabilities of these players. They work almost as financial partners. AFCs also provide guidance on procurement, deployment and disposal spanning the life-cycle of the asset. As AFCs are focused players in the segment, their decision-making is faster compared to banks. Unfortunately, they do not enjoy a level playing field vis-à-vis banks in terms of NPA provision, recovery of bad assets, access to funding, etc.

While leasing has been the most potent form of capital creation worldwide, multiple taxes reduce its efficacy in India. It is estimated that the used-items market size is three times the primary market. Higher tonnage cranes, mining equipment and material handling equipment are popular imports. But financing for used machines is very small, and there is no common platform for trading used equipment yet.

Normally, the life of any ICE is 7-8 years. With improved technology, this is bound to shrink. Thus, used equipment will become cheaper, making it an even more valuable proposition.

Also, in India most heavy ICE is not registered. This means ambiguity in ownership and improper valuation of assets, which hinders orderly growth of the used ICE market, making  financing a difficult task.

A low level of indigenisation (40-50 per cent) of domestic ICE industry has made availability of spare parts and after-sales service for used equipment another problem area.

Rental, too, remains low — 7-8 per cent compared to 50-80 per cent globally — because of a bias towards owning. With few organised equipment banks (Quippo is perhaps the only one with a national presence), there are limited outlets to dispose used equipment. Various tax incongruities in inter-state movement of ICE also nurtures unorganised rental players.

As more OEMs enter India, the problem of spare components and after-sales service may get addressed. But the government needs to evolve a conducive environment for new and used ICE along with the rental market.

(This story was published in Businessworld Issue Dated 22-08-2011)