Executive Summary

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-term in this sector. In order to bag big contracts, the companies need to have a big balance sheet size. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes after the projects get executed.

The industry continued the trend of cost cutting reducing debt and restructuring operations and manpower rationalization. As a result the bottom line for the industry as a whole improved significantly. Engineering majors redefined their core strengths and divested non-core businesses. As a result, engineering majors witnessed some improvement in the bottom lines.

Capacity addition and de-bottlenecking exercise being carried by various industries like steel, power, refineries, chemicals etc is likely to provide a fillip to the industrial segment of the engineering companies.

Overview

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.

The sector is relatively less fragmented at the top, as competencies required are high. But the sector is highly fragmented at the lower end (like unbranded transformers etc for the retail segment) and is dominated by unorganised players, as technology required is very basic.

The user industries in broad terms are power utilities (generation, transmission and distribution), industrial majors (refining, automotive and textiles), government (public investment) and retail consumers (pumps and motors).

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

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

Larsen & Toubro
BHEL
ABB
Crompton and Greaves
Thermax
Cummins
Ingersoll Rand
Siemens
Alfa Laval
Cummins

The previous year proved to be a good year for the industry as the industrial production grew by 6.9% as against 5.7% last year. The manufacturing sector witnessed a growth of 7.2% during the year. This reflected the picking up of investment activities.

The order books of almost all companies witnessed healthy growth. For the engineering majors like BHEL, the order book size stood at 2.8x 2004 revenues. In general, the growth in the order book came from both power and industrial (automation) business. The companies were able to bag international orders, once again proving their global competitiveness. The topline of the engineering majors witnessed a double digit growth during the year ended 2003-04.

The industry continued the trend of cost cutting reducing debt and restructuring operations and manpower rationalization. As a result the bottom line for the industry as a whole improved significantly. Engineering majors redefined their core strengths and divested non-core businesses. As a result, engineering majors witnessed some improvement in the bottom lines.

The diesel engine industry faced problems in increasing exports because of hike in price of inputs. The late realisation of export proceeds has also taken its toll on the industry. The rise in fuel prices (especially diesel) reduced the domestic sale of diesel engines as the cost of electricity generation went up.

Competitiveness: Engineering companies have been succeeding on the basis of their technical skills and an insulated economy. They cannot bank on theses strengths anymore, there is an urgent need to get competitive and build people attitude for this.

Sales vs. Fulfilment: Most engineering companies in India have managed growth by fulfilling on orders received; now they will have to actively solicit and develop business in a proactive manner.

Change Management: As competition increases and opportunities escalate, there will be a constant change in the organisational make-up and structure. On-going change management and people development in this environment will be a challenge.

Leadership: With technology not providing total differentiation, competitive environments eating into margins, leadership, initiative and innovation will be the order of the day in engineering companies. The benefits of cost-cutting initiatives have also been absorbed in the system. People assets will rule the roost

Leadership Expansion

Managing and Building Teams

Consultative Selling

Managing people in projects

Communication and Presentations

Customer Service

Government is laying a lot of stress on developing infrastructure like roads and power. Private sector, which includes both foreign and domestic investors, will play an important role. Private sector investments are dependent on political stability, clarity and consistency of policies and stable currency, all of which has been more or less fluid over the past three years.

Impetus given for growth to infrastructure and core industry in Finance Budget 2004-05 is expected to increase capacity utilisation of producers of coal, cement, iron ore and likely to increase demand for construction and mining equipment. Industrial growth and capital investment levels have improved and this will drive the growth in the coming years.

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

The Electricity Act 2003 has introduced a lot of reforms in the power sector. The unbundling in the sector will definitely boost private investment. PSUs like NTPC will almost double their generation capacity in next few years, which is a good sign for the engineering companies.

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

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, companies like ABB and Siemens will benefit a lot going forward.

Capacity addition and de-bottlenecking exercise being carried by various industries like steel, power, refineries, chemicals etc is likely to provide a fillip to the industrial segment of the engineering companies.

Last updated:

May 2005.