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Diesel Engines: Losing steam - Views on News from Equitymaster
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  • Nov 14, 2000

    Diesel Engines: Losing steam

    The quarter ended September 2000 was a mixed bag for the diesel engine manufacturers. While the small and medium range engine manufacturers like Kirloskar Oil and Greaves got hit, the large engine manufacturers like Wartsila Diesel performed exceptionally. Why the anomaly?

    The engines industry can be classified into three segments according to their relative Horsepower (HP). These include small range (2-20 HP), middle range (20-300 HP) and the large range (above 300 HP).

    The small engines fortunes are linked to the fortunes of the agricultural production. Tractors form the main user industry. Drought in states like Gujarat adversely affected agricultural production and hence, tractor and small engine demand. To boost demand, companies had to take a hit on margins and sell at lower prices. As a result, Kirloskar Oil Engines, which dominates this segment, saw an 87% decline in net profit in quarter ended September 2000. The company’s turnover saw a 19% growth during the quarter.

    In the medium range, Kirloskar Oil and Greaves are the two major players. This segment’s growth is dependent on demand from service industries like hotels, hospitals and telecom sector. However, demand from these sectors was found wanting. Therefore, Greaves Limited reported a huge loss of Rs 185 m on the back of a 13% decline in turnover for the quarter ended September 2000.

    Though the large diesel engines performance was better, it still left a lot to be desired. Cummins India, which dominates this segment, saw a marginal 3% growth in turnover, but its net profit improved by 25% over the quarter ended September 1999.

    It was Wartsila NSD, which saw a huge jump in both turnover and profits (67% and 204% respectively). The company operates in the above 1 mega watt (MW) i.e. above 1000 HP segment. This underlines that the investments in power sector are finally gaining momentum.

    Beneath these performances lurk some other dangers as well. Small and medium engine manufacturers like Kirloskar Oil and Greaves are facing increasing pressure on two sides. Bigger manufacturers like Cummins are entering small and medium segment for volumes. An even bigger risk for these companies will come post April 2001, when import barriers are lowered. Cheaper imports may eat away a large chunk of their market and hence, profits.

    With Cummins is looking at increasing its presence across all segments, it too is susceptible to the import risks post 2001, especially in the small and medium range. On the other hand, the company will eat away market shares from Kirloskar Oil and Greaves.

    Coming to the mega range (above 1 MW), the performance of Wartsila though encouraging, is by no means to be taken for granted. The mega range engine users are basically utilities and electricity boards. Their demand is usually not consistent and comes in fits and starts.

    All in all, the diesel engines segment does not offer a lot of hope to the small and medium engine manufacturers. Even for larger companies, the outcome is largely dependent on the growth in power sector investments. Though the potential for this is huge, the past track record of the power sector is a dampener.



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