Engineering Sector

Topics: Economic growth, Private sector, Infrastructure Pages: 7 (2263 words) Published: May 23, 2013
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 to medium-term. In order to bag big contracts, companies need to have a big balance sheet size and proven execution capabilities. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes as projects get executed. |  | Many tariffs that earlier offered protection to Indian capital goods manufacturers, have been removed or reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition. There have been numerous instances in the recent past where Chinese equipment manufacturers (especially in power generation) have snatched away orders from Indian companies due to the pricing advantage. |  | Power sector contributes the largest to the engineering companies' revenues. For instance, as of the latest fiscal year end, ABB and BHEL derive roughly 53% and 79% of their revenues from supplying equipments to the power sector. And with the government planning to add large-scale generation capacities in view of the paucity of power in the country, the potential seems huge for the engineering majors in both generation and the transmission & distribution space. |  | Infrastructure is another key area of operation for major Indian engineering companies. L&T's order book at the end of FY11, for example, contained around 36% of orders from the infrastructure sector which includes activities like engineering, design and Engineering of industrial projects and social & physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and water & effluent treatment projects. |

 Key Points| |
Supply| Abundant supplies available across most segments, except for technology intensive executions. Supply of power generation equipment has seen bottlenecks in the past. | Demand| Demand growth in this sector is fuelled by expenditure in core sectors such as power, railways, infrastructure development, private sector investments and the speed at which the projects are implemented. The pace of project execution has been lumpy in the year gone by due to delays in execution and achieving financial closure on the part of customers. | Barriers to entry| Barriers to entry are high at upper end of the industry as skilled manpower and technologies, and ability to fund large projects are a prerequisite.| 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 segments is low.| 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 completion of projects. Nevertheless, competition is getting progressively higher in the industry as companies of all sizes try to move towards scaling up their technology and capacity.|

 Financial Year '11| |
| The year gone by was disappointing one for the Indian engineering industry. Order inflows were weak due to delays in awarding projects, land acquisition problems and environmental issues. Even the operating margins came under pressure due to commodity price inflation. Thus, rising commodity prices and slowdown in order inflows proved to be a double whammy for the engineering companies. |  | RBI's tight monetary policy slowed the...
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