RESEARCH IT!  >>  SECTOR INFO  >>  JULY 10, 2009

 Engineering [Key Points | Financial Year '09 | Prospects | Sector Do's and Dont's]
  • Engineering is a diverse industry with a number of segments. A company from this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist or a niche player (like providing environment friendly solutions). It can be an electrical, non-electrical machinery and static equipment manufacturer too.

  • Order book size determines the performance of the company in the short to medium-term. In order to bag big contracts, companies need to have a big balance sheet size and proven execution capabilities. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes as projects get executed.

  • Tariffs that earlier offered protection to Indian capital goods manufacturers, have been removed. Import duties on a range of equipments have also been reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition.

  • Power sector contributes the largest to the engineering companies' revenues. For instance, ABB and BHEL derive 60% and 75% of their revenues from supplying equipments to the power sector. And with the government planning to add large-scale generation capacities in the eleventh (2007-12) five-year plan, the potential seems huge for the engineering majors. This is because, apart from the investment in generation capacity buildup, an equivalent amount is likely to be spent in the transmission and distribution space as well.

  • Infrastructure is another key area of operation for major Indian engineering companies. L&Tís order book at the end of FY09, for example, contained around 41% of orders from the infrastructure sector which includes activities like engineering, design and construction of industrial projects and social & physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and water & effluent treatment projects.

  • The resurgence of global crude prices on account of growing demand has led to increased activities in the exploration and development space. This has helped the engineering companies in this space. More importantly, this segment of the engineering business has relatively higher margins than infrastructure, owing to more complex tasks involved.

     Key Points

    Abundant supplies available across most segments, except for technology intensive executions.


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

    Barriers to entry

    Barriers to entry are high at upper end of the industry as skilled manpower and technologies, and ability to fund large projects are a prerequisite.

    Bargaining power of suppliers

    Bargaining power of suppliers is low because of intense competition amongst them. However, in technology driven high-end segments, suppliers have the upper hand.

    Bargaining power of customers

    Bargaining power for technology driven segments is low.


    Majority of the companies compete in terms of pricing, experience in specific field, product differentiation and timely completion of projects.


     Financial Year '09
  • FY09 proved to be quite a volatile year for the Indian engineering and capital goods industry. The credit crisis induced liquidity crunch dragged down the growth in industrial and manufacturing industries. This was reflected in slowdown of investment activities in areas like power, infrastructure and processes. Though there has been a pickup in activities since March 2009, and things have improved a great deal since September-October 2008, companies still remain extremely cautious in terms of making further capital investments and additional capacity expansion has been put on the backburner.

  • The order books of companies saw a mixed performance. Many companies were continued to bag international orders, many others saw a marked slowdown in order inflows. Though the topline of most well established engineering majors witnessed double-digit growth during the fiscal.

  • While the industry continued the trend of cost cutting through reducing debt and restructuring operations and manpower rationalization, rising input costs and staff costs pared the improvement in profitability. Sharp volatility in costs of steel and crude on the back of erratic global demand, was the biggest dampener to profit growth. Such an environment put to the test inventory and working capital management of companies in the sector.

  • The domestic macroeconomic fundamentals continue to remain strong. But the recent slowdown, especially in the industrial sectors may impact growth momentum of the capital goods sector in the short term.

  • World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in. This makes the future of the Indian engineering sector extremely bright.

  • The government's initiative to bring clarity to the power sector reforms is a welcome sign for the industry. More coordination between the Centre and states for infrastructure development is a step in the right direction.

  • The shift in focus towards reducing T&D losses will further increase the order book size of the companies operating in this realm. With power generation and distribution looking up, power equipment companies can look forward to a promising future.

  • The resurgence in global prices for crude has ensured sustained exploration and production activities both domestically and globally. Also, there has been a radical change in the governmentís approach to E&P (exploration and production) activities in the country. This thrust in development of new wells and improvement of output from old wells promises bright prospects for engineering companies

  • Automation business has perked as the user industries started realising its benefits. With increasing competition among the power companies, the consumers will demand better quality and uninterrupted power supply. In such a scenario automation will play an important role. With the automation technologies gaining momentum in the long run, companies like ABB and Siemens will benefit a lot going forward.

  • If Indiaís nuclear deal with the US goes off as planned, it will mean big business for companies planning to enter nuclear power generation and consequently power equipment manufacturing.

  • If the government opens up the defense sector to further participation from private players, this will make available another avenue for certain large companies in the sector that are looking to get in to this business which holds a large potential.

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