ENGINEERING & CAPITAL GOODS SECTOR 

• Heavy & Light Engineering
• Capital Equipment Manufacturers
• Automobile & Auto Components
• Metals & Mining

Global Industry Scenario: Recovering from the shock of “Global Economic Crisis”, major engineering MNCs have reinvented themselves into leaner, nimble, agile, and efficient so as to navigate through the turbulent times. They have been forced to accelerate innovation in product and service, and shift strategic focus on the growth opportunities in the emerging markets. With the advancement of technology in the industrial equipment manufacturing sector, technological innovation, intellectual property protection, volatilities in the commodity prices and stricter regulations have been posing constant challenges for the companies’ leadership. But the good thing is that the sector is poised for growth on a global scale with the leading companies being ready to adapt and benefit from these changes.

Indian Scenario:  The Indian engineering sector is the largest of the industrial sectors, one of the biggest employers, and the 2^nd highest exporters in the country. India’s low cost labour, inexpensive manufacturing capabilities, technological prowess, and abundant technical manpower, are its key competitive advantages.  The Indian engineering sector is a diverse industry comprising of manufacturers of power equipment (like boilers, transformers), engineering, procurement and construction (EPC) projects execution companies, manufactures of electrical & non-electrical machinery, other equipment and machine tools. ~2/3^rd of the engineering sector’s domestic demand comes from the power sector; and the rest from the projects in sectors like infrastructure, mining, oil and gas, refinery, railways, steel, automotive, etc. Indian engineering sector has attracted good FDI inflow of ~ US$ 2.6 Bn. during 2000- 2013.

But, recent few years have been challenging for the Indian engineering and capital goods sector in the domestic market, with the weakened infrastructure, power and coal sectors, where projects worth ~Rs2,00,000 crore have been stuck due to various problems. And the liquidity crunch at power and infrastructure companies has also affected investments. So, for the engineering companies’ orders inflows and margins have shrunk, and the pace of project execution of even existing orders has been erratic. The Chinese and Korean manufacturers have been posing competition to the Indian capital equipment manufacturers. Still, Indian engineering exports have done reasonably well, which have grown from US$34 Bn in FY08 to US$57 Bn in FY13 (11% CAGR); and are expected to touch US$70 Bn FY15.

The government has taken many policy initiatives – including relaxing FDI in defence and railways, increasing planned investment in infrastructure, steps to reform the power and coal sectors, fast-tracking of the stalled infrastructure projects, introduction of investment allowance for equipment manufacturers, which would help revive the engineering sector. Despite recent under-performance and challenges, the engineering sector has robust long term future prospects, given India’s unmet need for good quality infrastructure and energy for the sustained growth of the economy. Business sentiments have since improved with the installation of new central government. (Read full Industry Research Report on the Engineering Sector in India)

KLS&A Advantage:  Our consultants have a deep understanding of this sector and the capability to assist our clients in responding to the market challenges, by bringing in the top leadership talent who can add value to our clients. Our consultants have the experience and track record in attracting and hiring top-notch professionals for our valued clients, who are some of the large Indian and MNC engineering companies. Our founder has worked in the top leadership role with large engineering companies, and thus we intimately understand these businesses, and have vast network of professional contacts in the sector. With our experience, contacts and well-honed internal search methodology, our team is well positioned and ready to support you in meeting your human capital needs; and we would welcome the opportunity of partnering with you to hire human talent to add value to your business.

(References: Various media reports, press items, and research reports including from IBEF, and EM, etc.)

[Disclaimer: This general note which has very broad, indicative & unverified information of the industry sector has been compiled through secondary research from multiple sources; and is not meant to be relied on by anyone for any purpose. KLS&A is not responsible for any errors or shortcomings in the same.]

ENGINEERING SECTOR IN INDIA 

Industry Overview

The Indian engineering sector is the largest of the industrial sectors, one of the biggest employers, and the second highest exporters in the country. India’s low cost labour, inexpensive manufacturing capabilities, technological prowess; and ready availability of abundant technical manpower, are among the key competitive advantages.  The Indian engineering sector is a diverse industry with various segments – e.g., manufacturers of power equipment (like boilers, transformers), Engineering, Procurement and Construction (EPC) projects execution companies,  manufactures of electrical & non-electrical machinery, construction & other equipment, machine tools, etc. Almost 2/3^rd of the engineering sector’s domestic demand comes from the power sector; and the rest from the projects in sectors like infrastructure, mining, oil and gas, refinery, railways, steel, automotive, etc. Indian engineering sector has attracted good FDI inflow of ~ US$ 2.6 Bn. during 2000- 2013.

Challenges and Performance

Recent few years have been challenging for the Indian engineering and capital goods sectors.  In the domestic market, the engineering sector has slowed down substantially in recent years, with the weakened infrastructure and power sectors, which have been suffering from various problems, like delay in land acquisition, environmental and other regulatory approvals, and absence of coal-linkage. Projects worth ~Rs2,00,000 crore have remained stuck in the power, coal, mining, and road sectors. The High interest rates, unavailability of finances for the infrastructure and power companies, and their leveraged balance sheets, have also affected the investment cycle in capacity formation. Consequently, for the engineering companies, the orders inflows have reduced,  the margins have been under pressure with rise in input costs, and with many clients facing liquidity crunch, the pace of project execution of even the existing orders has also been erratic in the recent years. Also, the Indian capital goods manufacturers have been facing competition from abroad especially Chinese and Korean manufacturers since 2008-09. However; Indian engineering sector has done reasonably well on the export front during last few years. The broad long term trend in engineering exports.  has generally been upward from FY06 to FY12, except in FY10 and FY13.  India’s engineering exports have grown from US$34 Bn in FY08 to US$57 Bn in FY13 (11% CAGR).

Government Initiatives

The government has taken many policy initiatives – delicencing the engineering industry; liberalising and permitting 100% foreign direct investment (FDI) in most engineering industries; and now recently relaxing  FDI in the defence and railways from 26% to 49%;  doubling the planned investment in infrastructure from Rs20 trillion in the 11^th five year plan to Rs 41 trillion in the 12^th five-year plan (2012-2017); the govt.’s resolve to reform the power sector; the amended land acquisition law, and the setting up a Cabinet Committee on Investment (CCI) to fast track the major stalled infrastructure projects. The tax sop of 15% Investment Allowance for manufacturers on investment of more than Rs25 Crs in plant and machinery over a period of 3 years up to 31^st March, 2017, introduced in the Union Budget 2014-15, along with the government’s decision to continue the reduction in the excise duty for various manufacturing industries till December, 2014, would help the automobile and other engineering goods manufacturers. All these initiatives are positive developments; and would help revive the engineering sector going forward.

Prospects

Despite recent under-performance, and many challenges, the engineering sector has robust long term future prospects, given India’s insatiated need for good quality infrastructure and energy for the sustained growth of the economy. The government expects the engineering sector to contribute US$70 Bn (~20% of the country’s total exports) FY15. The automotive engineering service market in India is estimated to grow at an 18.22% CAGR during 2012-2016. The engineering research and development (ER&D) sector can grow from US$14 billion to US$ 44 billion in the coming few years; and the number of manpower in this sector may also grow from 4 lacs to ~ 12 lacs personnel. There is enormous potential for the engineering companies in both the power generation and the transmission & distribution (T&D) segments due to the power deficit in the country. Enthused by the growth prospects, many MNCs are setting up or expanding their production capacities in India. A business friendly regulatory environment and progressive policies expected from the new central government, incentives for the infrastructure sector, corrections of the bottlenecks in the power sector, and a buoyant capital market can help improve the sentiments, and upturn the capital investment cycle in the country.

Success Factors

A company’s order book size, strong balance sheet, experience, an established track-record of execution in the particular field, quality of equipment, and an experienced leadership and capable execution team are crucial for success in engineering sector.

(References: Various media reports, press items, and research reports including from IBEF, and EM, etc.)

[Disclaimer: This general note which has very broad, indicative & unverified information of the industry sector has been compiled through secondary research from multiple sources; and is not meant to be relied on by anyone for any purpose. KLS&A is not responsible for any errors or shortcomings in the same.]