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Engineering Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • 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.
  • In Union Budget 2019-20, the Government announced to invest US$ 1.5 trillion in infrastructure over the next five years. It has also eliminated tariff protection on Capital Goods and has reduced custom duties on a range of engineering equipment.
  • 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. FDI inflow to the engineering sector stood at US$ 3.6 billion during the period April 2000-March 2020.
  • The government has also proposed granting of loans of up to Rs 10 million for MSMEs within 59 minutes through a committed online portal. Under the Interest Subvention Scheme for MSMEs, Rs 3.5 billion has been allocated for FY20.

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 '20

  • Engineering exports accounted for over 60% of the total export in FY20 and stood at US$ 76.3 billion. Index of industrial production (IIP) for electrical equipment industry stood at 105.5 in FY20
  • However, FY20 was a challenging year for the Indian economy and despite efforts from the government, the manufacturing sector contracted by 0.7% in FY20.
  • BEML saw negative growth in its sales as disruptions in supply chain impacted both verticals. Sales from its mining and construction business fell 8% YoY, whereas sales from its rail and metro business fell 26% YoY. The company had spent an all time high of Rs 1.1 billion on research and development and most of its sales were from products developed inhouse.
  • The construction sector, recorded a six-year low growth of 1.3% with the construction of highways slowing down to 28 km a day during FY20, from 29.7 km a day achieved in FY19. Competition in this sector has increased with a higher frequency of smaller-sized bids attracting interest from smaller players. This sector is also beset with challenging payment terms in government tenders coupled with slow progress in land acquisition.
  • The Infrastructure business, which faces normal execution challenges in terms of delayed client clearances encountered some unprecedented issues in FY20. Change in some state governments led to reassessment of awarded contracts, while environmental-related work stoppages adversely affected work progress in some projects.
  • The impact of these challenges was accentuated with the onset of the pandemic which slowed down the economy, with the lockdown being implemented by various governments. The pandemic affected execution in the last quarter of the year, which otherwise is the busiest quarter for the segment in terms of progress and collections. This has had an impact on both revenues and profits, since the work sites had to be shut temporarily.
  • With the changing environment, the project sites were also required to adapt to a new set of norms for continuation of work, which hampered progress. The impact of the pandemic is expected to continue into the next financial year, and may taper off as normalcy gradually returns.
  • In March 2020, the Government approved the Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing. The scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.

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Prospects

  • 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 only about 30% 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?

HEG, Graphite India and Salzer Electronics were the top performers over the last 5 years in terms of sales and profit growth.

HEG's growth can be attributed to the low production cost advantages enjoyed by the company on account of its single-location plant and low labour costs whereas Graphite India's growth can be attributed to its established position in the global Graphite Electrode (GE) industry and the company's strong balance sheet that provides a high degree of financial flexibility to the company.

Salzer Electronics has also done well on the back of its leading market position in the domestic rotary switches market, healthy relationships with key industrial clients and its adequate financial risk profile.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

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.

Carborundum Universal (CUMI) ,HEG and Swaraj Engines 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

Resources on the Engineering sector

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