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Infrastructure spending to drive growth... - Views on News from Equitymaster

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Infrastructure spending to drive growth...

Jun 10, 2000

The nature of the Indian engineering industry is very diverse. Its major segments are capital goods (electrical, non-electrical machinery and static equipment), castings, forging and foundries. Castings, forging and foundries all have a strong inter-relation to the capital goods and automobile industry. A slowdown in the economy affects the engineering sector much before it filters down to other sectors as clients postpone investment decisions. However in an economic upturn this industry picks up last as various sectors like steel, petrochemicals, automobiles needs to perform well before they invest in capital and engineering goods for capacity expansions.

A majority of the companies compete in terms of pricing, but industry heavyweights such as ABB and Bhel compete in terms of technology based product differentiation. Low levels of modernization hamper the industry resulting in below par productivity levels. The unorganized sector dominates in segments where technology is not crucial.

Demand growth in this sector is fuelled by expenditure in core sectors such as power, railways, infrastructure development, and private sector investments and the speed at which the projects are implemented.

FY2000 has been a mixed bag for the industry. The slowdown in industrial investments and continued delays in implementing several planned power projects adversely affected profitability. But the industry responded cautiously and added very little capacity, as aggressive capacity additions in FY99 had left several companies with high interest burdens on one hand and depleted order books and unutilized facilities on the other. Cost cutting, reducing debt and restructuring operations became the buzzwords for the industry. This cautious approach resulted in improved capacity utilizations in FY2000.

Encouraging trends
Electrical machinery Growth*
Insulated cables/wires 80.0%
Protection systems/switchgears 35.0%
Telecables 29.0%
Transformers 24.0%
Turbines 21.0%
Electrical motors -23.0%
Non-electrical machinery  
Air/Gas compressors 140.0%
Bearings 71.0%
Diesel Engines 28.0%
Tractors 3.0%
* y-o-y in FY00

As a result, the non-electrical machinery segment saw an overall positive growth in FY2000. The electrical machinery segment was an outperformer in FY2000. Improved economic outlook saw demand rising in many user industries like telecom and power. Added to that, the growth in consumer products saw industries in this segment post much better results than in FY99. The growth was buoyed by speeding up of power sector reforms, which led to increased investments in the power generation segment.

But not everything is rosy. The industry continues to be plagued by the duty structure anomaly for raw materials and finished goods. Currently with the government strapped for cash, much of the investments in infrastructure and others will have to come from the private sector, which includes both foreign and domestic investors. Private sector investments however are dependent on political stability, clarity and consistency of policies and stable currency, all of which has been more or less fluid over the past three years.

Recently, the government has permitted the import of second hand capital goods that are under 10 years old without the need for a license. The move will definitely increase competitive pressures for domestic engineering companies. The decision to remove quantitative restrictions by April 2001 will have similar implications for the domestic companies.

Despite this, the industry has much to look forward to in FY2001-02. The government's initiative to bring clarity to the power sector reforms is a welcome sign for the industry. Also, with the government looking keen to speed up its divestment program and an increasing number of states looking to revamp their state electricity boards it is likely that investments in infrastructure will go up, fuelling demand growth in the engineering sector.


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