Employing over 4 million skilled and semi-skilled workers, the engineering sector is by far the largest sector of the overall industrial segments in India. Highly structured and technology-driven, this sector accounts for 12 per cent of India‘s economy.
Due to increased investment in infrastructure development and industrial production, the engineering industry in India has witnessed an unprecendented growth in the past few years. Today, India has an intense and diversified industrial machinery/capital base competent of rolling out an entire range of industrial machinery.
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The engineering industry is diverse, with a number of segments and divisions. However, despite the diversity, the sector is relatively less fragmented at the top. As the sector demands a high level of capability and investment, it is dominated by large organised players.
Industry Composition
• Multinational companies
• Joint ventures
• Large domestic players
• Regional players in the organised sector
• A large number of small players in the unorganised sectors which form the lower end of the sector.
The engineering industry can be broadly divided into two categories— heavy engineering and light engineering segments.
Manufacturing high-value heavy engineering goods using high-end technology involves a high level of capital investment, which is why this space is mostly dominated by the leading players.The small and unorganised players find it difficult to enter this segment. As a result, they have a small market presence in this space.
The light engineering goods segment, on the other hand, uses medium to low-end technology. Therefore the capital requirement in this segment is low, making it easier for small and medium enterprises to enter the segment.
The bulk of capital goods required for power projects, fertilizer, cement, steel and petrochemical plants and mining equipment are made in India. The country also makes construction machinery, equipment for irrigation projects, diesel engines, tractors, transport vehicles, cotton textile and sugar mill machinery.
The recent spurt in the domestic construction and infrastructure industry has accelerated the demand for most of the products. India also exports a range of heavy and light engineering goods.
The Tasks Ahead
• The technology needs to be further upgraded
• The industry needs to move up the value chain
• The scale of manufacturing activity needs to increase, so that the industry becomes globally competitive.
• A concerted effort to save time and costs needs to be made, by pushing for a healthier regulatory environment
Key Growth Drivers of the Indian Engineering Sector
The demand for engineering goods depends largely on the the GDP growth of a country. The growth, however, is a result of expenditure in core segments such as power, railways, and infrastructure development, private sector investments, and the speed at which projects are implemented. The power sector is the largest contributor to the revenues of engineering companies.
What basically drives growth of the engineering industry is capacity creation in sectors such as infrastructure, oil & gas, power, mining, automobiles, auto components, steel, refinery, consumer durables, etc. The other factors are listed below-
• Growth of the key end-user industries for engineering products
• Continuous flow of skilled man-power in the industry
• Government’s thrust on the power and construction industries
• India being preferred by global companies as an outsourcing destination as it enjoys lower labour cost and better designing capabilities
Looking Ahead
The sector’s future outlook is promising. New power projects, infrastructure development activities, industrial growth and favorable policy regulations will drive growth in manufacturing engineering products.
The Indian engineering industry has been witnessing a significant level of capability enhancement over the years. As export markets open up, this will help India develop a strong presence in global engineering exports.
Emerging trends such as outsourcing of engineering services can provide new opportunities for quantum growth with new product designing, product improvement, maintenance and designing manufacturing systems increasingly getting outsourced to countries like India and China.
With development in associated sectors like automotive, one of the largest evolving markets for engineering and industrial goods, and a well developed technical human resources pool, India is poised to make significant strides in all segments
of engineering.
| CRISIL Comments |
| CRISIL’s analysis of more than 480 manufacturers in the engineering industry in the SME sector reveals steady business and credit risk profiles, which are expected to be maintained in 2011-12 with a growth in the engineering industry. The business and credit risk profiles of these enterprises are supported by a long track record of the promoters in the business, adequate profitability, moderate gearing, and favourable shift in working capital positions. Most enterprises benefit from the extensive experience of the promoters; the average experience of the promoters in the same line of business was 19 years. The industry is dominated by family-run enterprises (54 per cent of the sample) and CRISIL’s analysis reveals that partnership firms have a better financial risk profile than proprietorship firms and companies in terms of lower gearing, higher operating margins, and growth in turnover. Partnership firms have ploughed back the wealth generated by business into the enterprise to undertake capacity expansion and thereby benefiting from higher volume growth. The profitability of CRISIL-rated engineering enterprises improved in 2009-10 on account of increased scale of production, enabled by significant investment in capacity expansion in 2008-09. Operating margins improved to 10.68 per cent during 2009-10 from 9.87 per cent in the previous year. Investments in production facilities during 2008-09 grew by 44 per cent as against 28 per cent during 2009-10. A significant proportion of these investments in capacity expansion were funded by equity and, therefore, the debt to net worth declined to 1.08 times as on March 31, 2010, from 1.15 times as on March 31, 2008. A majority of CRISIL-rated engineering enterprises (62 per cent) are concentrated in Maharashtra, Tamil Nadu, and Gujarat and are close to the manufacturing facilities of large equipment manufacturers and customer industries. Access to skilled employees, superior infrastructure facilities, and leadership position of these states in manufacturing sector has helped the growth of SMEs in these states. A notable finding of CRISIL’s analysis has been that SME players from Maharashtra reported higher operating margins of 13.63 per cent than Pan India margin of 10.68 per cent during 2009-10 on account of lower manufacturing costs. Employee productivity (sales per employee) is also higher in Maharashtra at Rs 1.82 million in 2009-10 compared to the national average of Rs 1.23 million. |
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