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Engineering Sector Analysis Report 

[Key Points | Financial Year '19 | 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 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, automotive, 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.
  • The Capital Goods industry is the “mother” of all manufacturing industry and is of strategic importance to the National security and economic independence.
  • India on its hunt to become a global superpower 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 summit body in charge of promotion of engineering goods, products and services from India.
  • The Indian semiconductor industry offers high growth potential areas as the industries which source semiconductors as inputs are themselves witnessing high demand.
  • The government has made declarations to invest US$ 1.5 trillion in infrastructure over the next five years.

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 growth in this sector is fueled by expenditure in core sectors such as power, railways, infrastructure development, private sector investments and the speed at which the projects are implemented. The pipeline for projects is down to a trickle due to the current slowdown in private investment and the pace of project execution has been lumpy in the year gone by due to many delays in execution and cash crunch on the part of clients.
  • Barriers to entry
  • Barriers to entry are high at upper end of the industry as skilled manpower and technologies as well as ability to execute large projects are a prerequisite in engineering sector. However, in few construction businesses like road business, which are not very technologically inclined, the company’s expertise in execution is the key differentiator.
  • 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 and highly skilled segments is low. However, fierce competition has increased bargaining power of customers in power generation and T&D equipment.
  • Competition
  • Majority of the companies compete in terms of pricing, experience in specific field, quality of equipment, capabilities with respect to size of projects that can be handled and timely execution. Nevertheless, competition is higher in the industry as companies of all sizes have been trying to move towards scaling up their technology and capacity.

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Financial Year '19

  • Comparative advantage regarding peers in terms of manufacturing costs, market knowledge, technology and creativity has been a driving force for engineering exports from India. In FY19, India’s engineering export crossed Rs 5,800.9 billion (US$ 83 billion). Engineering exports grew 6.3% and touched Rs 453.6 billion (US$ 6.5 billion) in April 2019.
  • During FY08–FY19, engineering exports from India registered growth at a CAGR of 8.5%.
  • Foreign Direct Investment (FDI) will now be allowed through 100% the automatic route through initiatives like ‘Make in India’, major international players have entered the Indian engineering sector due to significant growth opportunities offered. Various mechanical and engineering industries have received FDI inflows worth Rs 250.2 billion (US$ 3.6 billion) during April 2000 to March 2019.
  • Several companies in the engineering sector have diversified, either geographically (mainly to Middle Eastern countries) or sector-wise. BHEL plans to foray into Ukraine, Simplex Infra has moved to the Middle East, Larsen and Toubro (L&T) has diversified into power equipment manufacturing, Thermax entered the power utility segment.
  • The Union Cabinet has approved incentives up to Rs 100 billion (US$ 1.5 billion) for investors by modifying the M-SIPS scheme, in order to further incentivize investments in electronics sector, create employment opportunities and lessen the need on imports by 2020.

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Prospects

  • Companies involved in the engineering sector are virtually on a roll. Capacity creation in sectors like infrastructure, power, mining has been encouraging demand in the engineering sector. Separately, the approval of significant number of special economic zones (SEZs) across the country and the development of the Delhi.
  • Mumbai Industrial Corridor (DMIC) across seven states is expected to further boost the engineering sector.
  • From a policy perspective 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 with numerous variations of BOT (build, operate and transfer) projects being awarded to various private sector companies. The government has also put in place dispute resolution mechanisms for PPP projects. The long-term future of the Indian engineering and construction sector remains promising.
  • Any government initiatives to bring clarity to power sector reforms are welcome. As per Government official reports, regulatory delays have stalled projects large projects in the road, power, coal and mining sectors. The government has been working on trying to fast track large sized infrastructure projects. It will work to expedite these projects which have been stalled due to delay in clearances, funding and various other reasons. These initiatives may help revive the Engineering and Construction sector going forward.
  • Government has proposed granting of loans up to Rs 10 million for MSMEs within 59 minutes through a committed online portal. Under the Interest Subvention Scheme for MSMEs, Rs 3,500 million (US$ 52.5 million) has been allocated for FY 2019-20.
  • Turnover of capital goods industry is expected to increase to US$ 115.2 billion by 2025E. India’s engineering R&D market will increase from US$ 28 billion in FY18 to US$ 42 billion by FY22. The market size of construction equipment industry is expected to grow near US$ 5 billion by FY20.
  • Infrastructure investments are expected to rise up to 50.2 trillion (US$ 778.9 billion) in FY18-22, which will provide a significant boost to demand for capital goods.

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Related Links for Engineering Sector
Quarterly Results | Sector Quote | Over The Years

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