Why rental dominates in India

Two thirds of construction equipment sales in India are to rental companies, according to new data from specialist market research and forecasting company, Off-Highway Research. This puts rental penetration above that of many mature markets. Only the UK, to Off-Highway Research’s knowledge, sees a similar proportion of equipment sold to rental companies.

Caption: Indian company Rentease International LLP specialises in the rental, sales and service of access equipment. (Photo: Rentease.)

Rental growth

It is also striking that rental penetration has seen considerable growth in India over the last decade. The proportion of machines sold to this channel has risen from 47% in 2010 to 67% in 2020 and 2021.

Last year, that equated to more than 45,000 machines sold to rental out of a total market of just under 68,000 units.

According to Off-Highway Research’s General Manager in India, Samir Bansal, the growth in rental has been driven by contractors not wanting to own equipment themselves, combined with changes in the qualification process for government contracts in India.

“Rental accounted for less than 50% of the market in 2010. At that time, a lot of contractors had to own equipment to be eligible for government contracts. However, government requirements have now changed and contractors only need to have access to equipment. They don’t have to show ownership. Contractors have been happy about that – they don’t have to invest in the equipment or maintain it,” he said.

“To be clear,” he added. “These are genuine rental companies. They own equipment but they do not undertake construction work themselves. They are not to be confused with contractors who might rent out spare, or under-utilised machines to their peers.”

But as big as the rental segment is in India, there are virtually no major chains or national networks. It is an extremely localised activity “Despite rental being so big, it is very fragmented,” said Mr Bansal “It is all small private companies. The only exception is in the bigger mobile cranes, where there are large rental companies.”

One of the historic barriers to a more consolidated and coherent industry in India were the levies on inter-state transportation of goods. These were removed as part of the simplification and consolidation of the Indian tax system under the Goods & Services Tax (GST) which was introduced in 2017.

Mr Bansal said, “The introduction of GST means the industry may become more organised. Now there is one national tax, it is a lot easier from a taxation point of view to shift a machine from one part of the country to another.”

Skyscraper construction, background The Imperial Towers and Antilia, Bombay, Mumbai, Maharashtra, India, Asia. (Photo: Reuters / Dinodia Photos / Alamy.)

He continued, “Another reason small companies have been successful is that a there has historically been a lot of cash business. Paying in cash is of course a way of avoiding tax.

“The introduction of GST has made that more difficult, so again, in future, these rental companies might become bigger and more organised.”

Indian market structure

The structure of the Indian market is an unusual one. Demand for backhoe loaders is huge, more than 37,000 units in 2021, or some 55% of the Indian market. At times in the past sales of backhoe loaders in India have been greater than the rest of the world combined. More than three quarters of backhoe loaders in India are believed to be sold to rental companies, and rental is a similarly dominant channel for another high-volume product, crawler excavators.

In value terms, Off-Highway Research estimates that the retail value of the Indian construction equipment industry was US$4 billion last year. Purchases by rental companies accounted for US$2.3 billion of this, or 58 per cent.

This is a lower proportion than rental’s share in unit terms (67%) because of the high number of backhoe loaders – a relatively low cost machine - bought by rental companies. However, this share in value terms has taken a huge leap from where it was in 2010, when, despite representing 47% of the machines sold in unit terms, rental accounted for just 31% in value terms - about level with the share attributable to contractors.

Off-Highway Research is a KHL company. The information in this article is drawn from Off-Highway Research’s new Customer Group Database Service. For more information, visit www.offhighwayresearch.com.