We are also aiming at a capital light growth model
Tell us about the challenges faced due to COVID-19 and its impact on the Construction Equipment sector and overall economy.
Devendra Kumar Vyas
Managing Director
Srei Equipment Finance Ltd
Tell us about the challenges faced due to COVID-19 and its impact on the Construction Equipment sector and overall economy.
If FY20 was a bad year for Construction Equipment with an election-induced construction slowdown, liquidity crises, slump in manufacturing, and sporadic floods; FY21 couldn't have started on worse note. The on-going Coronavirus, or more specifically Covid-19, outbreak threatens domestic and global growth for at least the first quarter of this fiscal.
Even if we manage to contain the outbreak, re-organizing the migrant workforce and overcoming the initial supply-chain hiccup will take some time. That the second quarter is a monsoon period, which markedly impacts construction, doesn't help the situation either. The Construction Equipment sector which saw a CAGR growth of 24 per cent between FY15 and FY18, witnessed a de-growth of about 35 per cent in FY20. The Construction Equipment Finance sector was impacted similarly.
However, India's long term growth story remains intact. The government realises that economic growth cannot be achieved without a growth in infrastructure. Worldwide, redoubling of investment in infrastructure is a key strategy to counter the impacts of a downturn. The government has begun the exercise of creating a national infrastructure pipeline with a vision to invest Rs.100 lakh crores in infrastructure over the next five years. Already highway projects worth approximately Rs.15 Lakh crores have been identified. Once these investments materialize, we will soon see positive impacts in sectors such as cement, steel and automobiles, besides of course the infrastructure and construction equipment sectors.
For infrastructure segments like road, which has seen a lion's share of such investment in the past, the equipment intensity (equipment cost as a per cent of overall project cost) is as high as 15-20 per cent, while for the other segment it ranges between 5-20%.
The good news is that we are already witnessing the Government's intent of reviving infrastructure. The Ministry of Road Transport and Highways (MoRTH), in consultation with the National Highways Authority of India (NHAI), is drawing up a 10-point agenda to get the construction activity up and running once the national lockdown is lifted. Even as lockdown is partially lifted, MoRTH is in talks with the state governments to re-start highway construction projects where migrant labourers can be gainfully employed. We see construction activity already starting in UP.
I believe, we will shortly see the industry revive and achieve the 20 plus per cent growth it had witnessed in the recent past.
With depreciation in sales, what will be your revival strategy to handle the situation post the lockdown?
I am a firm believer that every crisis is an opportunity to do things you could not do before. The crisis will accentuate a promising trend which we have been observing in the recent past - A shift in the customer's behaviour from owning a product to requesting a service.
Off late, there has been emergence of companies providing service rentals and pay-per-use models which is dramatically changing the total cost of ownership for the customer. I believe that the current scenario will push customers to go digital, and rethink about the entire concept of owning an asset. The economy today faces a unique problem - the need for investment at a time when the banking system is under-capitalized and is only able to offer a limited range of products.
Thus, we are betting big on Leasing and Rental products to pick-up post the lockdown. Earlier rented equipment were used only for complex projects such as wind energy, thermal power, port construction, etc. However rental products should now gain a buy-in even from smaller projects.
As a strategy we are also aiming at a capital light growth model. Over the last year, we have entered into co-lending partnerships with banks to reduce risks on the company's balance sheet. The co-lending partnerships are a part of this endeavour. We believe that the combined reach and resources of an NBFC and a Bank would enable customers not just to benefit novel finance solutions but also experience an array of new age banking products. Besides, the combined reach and resources of the two lenders under these blended lending arrangements will benefit customers with faster credit delivery and provide them access to life-cycle finance opportunities.
We also believe that the crisis would fundamentally shift how people live, work, and use technology. As Srei believe that the right technology increases efficiency multi-fold. Better technology has enabled us to “Do more with less”. As a part of our on-going strategy we have tied up with iQuippo, an end-to-end digital lending marketplace where a customer can choose the most suitable offer, from our tie-ups. The platform will provide transparency and simplify the loan application process and will make equipment finance decisions easy for our customers.
The COVID-19 wipeout has impacted laborers/ small operators immensely. What are the measures being taken to support them?
Yes, the sudden displacement of migrant labour would have far-reaching consequences for our industry. Further, a significant number of workers who have left the urban centres may never return, preferring to make a living out of farming, or find work in nearby towns. To support our smaller customers which include first time buyers, first time users, and small operators and SMEs, we have adopted a two-pronged approach.
We realise that this crisis would leave many machine owners without a productive avenue to deploy their equipment. We will endeavour to leverage on our large customer base, which includes leading infrastructure players, to matchmake and productively deploy these idle equipment. Further, through our used equipment financing solution we will strive to help existing customers to sell their equipment to prospective used equipment buyers.
Finally, by virtue of being present in the industry for more than three decades, we have weathered many business and economic cycles. However for many of our customers who are SMEs or small hirer-operators, this is the first time they are witnessing a crisis of this magnitude. We believe it is our duty to handhold our customers during this crisis. Over the next few weeks, we will be intensively reaching out to our customers and guide them on the strategy to be followed in these trying times.
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