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Engineering Sector Analysis Report 

[Key Points | Financial Year '23 | Prospects | Sector Do's and dont's]

Revealed: Our 'Shadow Investing' Secret for Small Cap Stocks

  • The engineering sector is the largest of the industrial sectors in India and can be broadly categorized into two parts, namely heavy engineering and light engineering.
  • India's engineering industry accounts for 27% of the total factories in the industrial sector and represents 63% of the overall foreign collaborations. It has also emerged as the largest contributor to the country's total merchandise exports.
  • Capacity creation in sectors such as infrastructure, power, mining, oil & gas, refinery, steel, and consumer durables are driving demand in the engineering sector. The sector has a comparative advantage in terms of manufacturing costs, market knowledge, technology and creativity.
  • Rising competition is driving domestic players to focus on improving their capabilities, become more quality conscious and upgrade their technology base in line with global requirements. More than 2500 firms in the engineering sector have ISO 9000 accreditation.
  • Most Indian companies are increasing their global footprint. Cheap labour is giving them an edge over companies in higher wage economies. Besides targeting developed economies across Europe and North America, Indian companies are currently diversifying in developing markets of Africa, South America and the Middle East.
  • India has made significant strides towards the development of its engineering sector. The Government of India has appointed the Engineering Export Promotion Council (EEPC) as the body in charge of promotion of engineering goods, products and services from India. The Department of Heavy Industry has also approved four Centres of Excellence in textile machinery, machine tools, welding technology and smart pumps.
  • 100% FDI is allowed through the automatic route, which has led major international players such as Cummins and GE, who are looking for growth opportunities, to enter the Indian engineering sector.

How to Research the Engineering Sector (Key Points)

  • Supply
  • Supply is abundant across most of the segments, except for technology intensive executions. However, supply of equipment faces bottlenecks such as logistics and lack of manpower for timely assembly and erection of equipment, etc.
  • Demand
  • Demand is fueled by expenditure in core sectors such as power, railways, infrastructure development, and the speed at which the projects are implemented.
  • Barriers to entry
  • High, considering the capital intensive nature of the industry and reputation attached to the existing players
  • Bargaining power of suppliers
  • Low, because of intense competition amongst them. However, in technology driven high-end segments, suppliers have the upper hand.
  • Bargaining Power of Buyers
  • Low, in technology oriented segments. However, fierce competition in power generation and transmission equipment has increased bargaining power of customers.
  • Competition
  • Intense among major players. Companies compete on pricing, experience in a particular field, product quality, and capability of handling projects. However, small companies are trying to revamp their scale and size.
  • Threat of Substitutes
  • Low, due to the nature of the industry. If a buyer wants to revamp or renovate its existing stock, it is likely to go to the same players.

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Financial Year '23

  • The Indian economy has shown resilience and emerged as the fastest-growing major economy, with a GDP growth rate of 7% in FY23. Core industry output reported a growth of 7.6% driven by higher output of coal, cement, and fertilizer industries.
  • For FY23, the production of capital goods rose by 12.9% YoY, while production of infrastructure and construction goods rose by 12.5% YoY. Exports of engineering goods from India stood at US$ 107.04 billion.
  • The government's continued thrust on infrastructure-driven, capex-led economic growth, together with signs of a revival of private sector investment in manufacturing and an improvement in capacity utilization, maintained the growth momentum.
  • The Manufacturing Purchasing Managers' Index (PMI) throughout 2023 remained above 50 indicating an expanding output. After a dip in October, it rebounded in November 2023 to 56, signaling 29th consecutive month of expansion in factory activity.
  • India's manufacturing sector also witnessed growth in new orders rebounding from October's one year low and exports extended their growth streak for the 20 month. Electronics manufacturing services in the country stepped up significantly driven by higher share of outsourcing by Original Equipment Manufacturer (OEM) and the shift from contract manufacturing to Original Design Manufacturing (ODM).
  • The Indian construction equipment (CE) industry, turned in its best-ever performance with 26% YoY growth in FY23 as sales crossed the one lakh unit mark driving on road construction and railway demand.
  • Infrastructure development continued to be a focus area for the Government of India, with multiple projects being executed under the initiatives - PM Gati Shakti and the National Infrastructure Pipeline.
  • The Union Budget 2023-34 increased the outlay for capital investments by 33% to Rs 10 tn. Developing quality infrastructure will be instrumental in reducing the cost of logistics and will boost exports by improving the competitiveness of Indian products.
  • In January 2023, Bharat Heavy Electricals Ltd (BHEL) bagged the order for renovation and modernization of 200 MW Unit-3 and 210 MW Unit-5 steam turbines at Ukai thermal power station in Gujarat.

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  • The Indian government's 'Make in India' clause in tenders of Public Sector Undertakings (PSU) establishments stands to benefit the sector as it looks to promote local manufacturing, thus posing entry barriers to players with imported offerings. The material handling equipment sector is expected to gain from robust demand from steel, power, mineral and other infrastructure industries.
  • Coal India has set itself an annual production target of 1 billion tonnes by 2024 and is expected to spend the bulk of its capital expenditure in the next few years on acquiring heavy machinery and transport wagons. These stiff targets would drive an increased demand for higher tonnage mining equipment.
  • Demand for machine tools from the capital goods sector is projected to remain high. Considering the industry's demand for higher productivity, superior precision, accuracy and low cost manufacturing solutions, Computer Numerically Controlled machine tools are set to be in greater demand.
  • India allocated over Rs 802 billion for upgradation of 125,000 km of rural roads under phase III of the Pradhan Mantri Gram Sadak Yojana. Demand for related machinery in building roads is expected to significantly increase due to large scare public and private investment in roads.
  • The Government has approved a significant number of SEZs across the country for the engineering sector. Delhi Mumbai Industrial Corridor (DMIC) is being developed across seven states and is expected to bolster the sector.
  • Under the National Infrastructure Pipeline (NIP), roads, urban and housing, railways, power (renewable and conventional) and irrigation comprise 80% of the total plan. This investment and initiative from the government will create a good opportunity for the engineering sector in the coming years.
  • As the implementation of the Mass Rapid Transit System (MRTS) at various metros has progressed well, the government's focus has turned to Tier II cities, and opportunities are being sighted there. The government's emphasis on augmenting local water resources launched under the Jal Jeevan Mission is also giving rise to good prospects.
  • There is also a rising demand for medical and surgical equipment. The industry manufactures a wide range of medical equipment such as ECG and X ray scanners and caters to 40% of demand while the remaining is met through imports. Export of medical and scientific instruments reached US$ 36 billion in FY20.

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FAQs on the Engineering Sector

How has the engineering sector performed in the past decade and when is a good time to invest in the sector?

The engineering (capital goods) sector has delivered returns of over 400% in the past decade.

Engineering stocks are usually risker as their fortunes are prone to economic booms and busts and for this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down. However, before selecting a stock, one must check whether the industry is due for revival or not.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Infrastructure Index and BSE Capital Goods Index

Where can I find a list of engineering stocks?

The details of listed engineering companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of engineering stocks.

Which engineering stocks were the top performers over the last 5 years?

GMM Pfaudler, Praj Industries and MTAR Technologies were the top performers over the last 5 years in terms of sales and profit growth.

GMM Pfaudler's growth can be attributed to continued leadership position in the glass lined equipment (GLE) market, its experienced management and improving financial risk profile whereas Praj Industries' growth can be attributed to established market position in the ethanol project and process engineering business.

MTAR Technologies has also done well on the back of its established market position with long standing relationships with its customers and extensive experience of promoters.

To know which other companies performed well over the last 5 years, use Equitymaster's stock screener.

What kind of dividend yields do engineering stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top engineering stocks offering high dividend yields.

Which are the engineering stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Siemens, ABB India and Jain Irrigation are the top engineering stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other engineering stocks offer great return on capital employed, you can check out the top engineering stocks offering the best RoCE here.

Which are the best engineering stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

  • Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

    To find stocks with favorable P/E Ratios, check out our list of engineering stocks according to their P/E Ratios

  • Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

    To find stocks with favorable P/BV Ratios, check out our list of engineering stocks according to their P/BV Ratios

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