Time for Rental Companies to Adapt, Consolidate & Perform

Challenging times, like the current pandemic, must drive industries to adapt to the situation, reshape their business strategies, and revisit their growth plans, in order to emerge stronger.

Satin Sachdeva, Secretary General, CERA & MD, Equipment Planet

Recently, the Global Rental Alliance (GRA) discussed the various issues of the rental industry, including promoting the industry, attracting and retaining talent, sustainability, digitalisation, global market data, and the unprecedented challenges presented by the Covid-19 pandemic. CERA (Construction Equipment Rental Association), which is now a member of the GRA, is geared up to participate in more discussions during the next meeting in June’21.

According to the projections of S&P Global Ratings, the second wave of Covid infections may derail a strong recovery of the Indian economy. In fact, S&P projects a lower than previously anticipated GDP growth rate in different scenarios, and that the second wave may also challenge an otherwise strong recovery for the Indian infrastructure, which would hit economic growth and cash flows into the infrastructure sector.

The only silver lining is the government’s focus on infra development, so we should be in a strong position to leverage it. But the situation so far has not been encouraging for the rental industry. In 2020, the impact of the pandemic was such that it brought ongoing construction projects to a complete standstill, or with limited activity at the project sites.

By the end of the year, when it seemed that the bad phase had passed, India began to witness the second wave, which once again put the rental industry under tremendous pressure. Payment receipts from the market have come to a halt as the infrastructure projects are also facing a lack of funds. Consequently, there is pressure on rental rates also. India’s equipment rental industry is actually seeing the combined effect of the pandemic and the oversupply of construction equipment in the market. In fact, the latter situation has been going on for the last two or three years and is of great concern.

Concerns of the Construction Equipment Rental Industry
  • Rental companies employ lakhs of people and it is the duty of the companies to pay the salaries of their employees on time, especially during this pandemic
  • Paying GST and other dues to the government as the country may need funds to fight the pandemic threat
  • Paying EMIs to the banks for construction equipment bought on finance
A study by ERA (European Rental Association) has stated that the European equipment rental sector was also severely impacted by the pandemic in 2020, but the companies were agile in adjusting their costs and adapting to the challenges; with the result that the impact of the pandemic was mitigated to some extent.

The scenario in India is not so different, and therefore, the approach that our equipment rental industry should take has to be futuristic. It should first adapt to the current challenges thrown up by the pandemic, and then consolidate and perform.

The rental companies are cooperating with construction companies and contractors and extending the best possible support. But this cannot go a long way as it will endanger the survival of the rental companies, unless they receive their payments.

Looking for Government’s Intervention
CERA has already apprised the government through a letter to minister Nitin Gadkari that the industry is undergoing a worsening situation in this second wave of the pandemic as payments to us have been inordinately delayed or stuck.

The government should take a serious approach to address the concerns of the equipment rental industry as it is the backbone of India’s infra development, which is also the goal of the Modi government.

This is the time when the government should urge all the construction companies and government departments to clear all the pending dues of the rental companies and also give interest-free moratorium on bank EMIs and loans taken for construction equipment, for at least six months, and also give a tax holiday for 2021-22.

The government should support the industry more by levying GST on reverse charge basis, making the service receiver liable to pay GST, or should make GST a liability on the service provider after the company has received payments.

Urging Rental Companies to Step Up
A disciplined fleet management is key for rental companies to consolidate and perform as it will support better rental rates through the downturn, and expedite the pace of fleet right-sizing to adjust to current demand levels. However, the industry should search for more rental models, including customised models, so that more choices are available to the clients.

In Europe and other countries, rental companies pruned their fleets to conserve cash and adjust to the lower demand environment.

Future Developments & Opportunities
The industry is hopeful of a turnaround soon as India’s construction equipment market is projected to cross $4.7 billion by 2025 on account of anticipated growth in the construction industry, increasing foreign investments, and rising number of Infra projects across the country. Some of the largest infra projects include the Smart City Mission, AMRUT (Atal Mission for Rejuvenation of Urban Transformation), Metro Rail in urban areas, Bharatmala, and Sagarmala, among others. Only 24% of the highways in India are of 4 lanes, so there is a huge opportunity in the roads sector. India is expected to be the world’s third largest construction market by 2022. But for this, India will need investments to the tune of Rs. 50 trillion in the infrastructure sector within the next two years.

The rental industry must prepare for the next level of growth as the current phase of slowdown is also going to start deliberations on the benefits of renting, and factors that will promote renting equipment over buying. The rental industry must tap all the opportunities in the market in order to survive, or else perish.
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