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In troubled waters… - Views on News from Equitymaster
 
 
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  • Oct 7, 2000

    In troubled waters…

    In May this year, when the commerce ministry released the monthly export figures, it surprised many. India exports during the month surged by more than 30 percent over corresponding month last year to US$ 3.4 billion. The analysis revealed that some of the major contributors to this growth are sectors such as readymade garments, electronic goods and engineering. Did somebody say engineering and electronic goods!

    The export of engineering goods saw a significant 74 percent growth to US$ 439 million. Electronic goods surged more than 50 percent to US$ 50 million. The performance of the engineering industry on the export front is quite in contrast to their performance at home.

    Going nowhere…
      Sales Net Profit
    Company FY99 FY00 FY99 FY00
    BHEL 71,832 66,085 5,446 5,250
    Crompton Greaves 16,825 16,746 231 -1,466
    Bharat Electronics 12,263 15,406 536 1,015
    Bharat Earth Movers 12,442 13,168 6 150
    Siemens 10,080 10,834 -560 351
    KEC International 10,579 9,373 259 86
    Cummins 6,451 8,258 746 933
    ABB 8,692 7,758 377 372
    Blue Star 4,717 4,750 162 232
    Ingersoll Rand 3,728 4,134 546 568
    Total 157,609 156,512 7,749 7,491

    In financial year 2000 instead of showing growth, the turnover of India’s top 10 engineering companies fell, albeit marginally by 1 percent. The profit of these companies also fell by a marginal 3 percent. Why this stark contrast in performance?

    Early statistics indicated signs of a revival in the economy. The revival could be seen in the demand pick up for cement, commodities, automobiles, auto ancillaries and hotels, atleast in the later half of the financial year 2000. So it was only logical that the engineering companies follow suit.

    One reason for this adverse performance is the fact that when economic recovery takes place, the engineering sector is last one to record the same. The recovery takes time to trickle down to this sector. Another major reason is that almost all the big engineering companies depend largely on the power sector led demand growth. The power sector as we know, has huge potential. But the going by the precedents in the sector the potential looks like remaining just that i.e. potential.

    To build an effective counter to this stagnation in their turnover and declining profitability, companies like Cummins India, Siemens India, ABB India, Ingersoll Rand, Atlas Copco, Revathi CP, Wartsila Diesel (all are subsidiaries of global multinational engineering majors) sought to reposition themselves as sourcing hubs for their parent companies.

    Indian operational costs are one of the lowest in the world (staff costs etc.) and so many of these companies focused their energies on manufacturing products suited for the parents’ markets worldwide. This is probably one of the reasons that the export of engineering goods saw such a surge. On hindsight, the difficult situation at home propelled the sector to excel abroad.

    Coming back to the present, India’s economic scenario is giving worrying signals. On the macro front, the growth in India's index for industrial production (IIP) had been mostly consumption led. Even that is now showing signs of slowing down. During April-May 2000 the IIP actually fell to 5.6 percent from 6.2 percent in the corresponding period during financial year 1999.

    What could make the situation even worse is the sharp rise crude oil prices. The crude oil prices have yet to filter down to the Indian population. Once they do, economists fear inflationary pressures would force consumers to postpone purchase of capital goods. This would further spike any recovery in demand for the engineering sector and put pressure on the already thin margins.

    What can probably bring the spotlight back on the engineering sector is major growth in power sector investments. This will come in only when the reforms process holds promise for private companies and corporatisation of State Electricity Boards (SEBs) takes place. Restructuring of the government owned engineering companies would also add value to the sector. By restructuring we mean, either a divestment in favour of a strategic partner or dividing big behemoths like Bharat Heavy Electricals (BHEL) into smaller entities to give them sharper focus and a competitive edge.

    Until that comes, it will be the same old story for the sector.

     

     

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