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HEAVY

INDUSTRY - OVERVIEW

Engineering industry can be considered as the mother of all industries. No sector of the economy develops in isolation. The engineering sector is characterized by linkages with other economic sectors, since this sector is the supplier of their capital equipment’s. The engineering sector is the largest sector amongst other industrial segments. It is a diverse industry with a number of segments, and can be broadly categorized into two parts, namely, Heavy Engineering and Light Engineering. There are however a number of sub sectors within the engineering industry namely iron and steel; other base metals and their products; mechanical machinery; electrical machinery; equipment (including auto motives); instruments and appliances; time

measuring instruments; musical instruments; arms and ammunition; and and related articles etc. Heavy engineering industry involves one or more perspective such as big and heavy products and facilities like , large machine tools, and huge industrial structures, or huge complex with the number of process under one roof. Heavy Engineering Light Engineering

iv) Sophisticated microprocessor- i) Capital based equipment ii) Transport Equipment v) Low tech items – , iii) Other Machinery castings, fasteners etc.

Capital goods industry is a part of heavy engineering industry which serves as a strong base for its engagement across sectors such as Engineering, , and Consumer goods. Capital Goods refer to products that are used in the production of other products but are not incorporated into the new product. These include machine tools, industrial machinery, process plant equipment, construction & equip- ment, electrical equipment, textile machinery, & packaging machinery etc.

INDIAN OUTLOOK

The engineering sector, being closely associated with the and infrastructure sectors, is of strategic importance to India’s economy. This sector has witnessed a remarkable growth over the last few years driven by increased in infrastructure and industrial production. The Government of India has appointed the Engineering Export Promotion Council (EEPC) as the apex body in charge of promotion of engineering goods, products and services from India. India exports transport equipment, capital goods, other machinery/equipment and light engineering products such as castings, forgings and fasteners to various countries of the world. In India different types of heavy machinery for the varied sectors like textiles, power plants equipment, motors, steel, infrastructure, defence etc. are manufactured.

In a bid to compete with world players as well as to mark a foray into defence and nuclear applications state-owned capital goods maker Heavy Engineering Corporation will be spending close to Rs. 2,300 crore over the next three years to replace its equipment and refurbish some existing facilities. Out of total planned money Rs. 1300 crore will be spent on the rehabilitation drive while rest amount Rs. 1000 crore will be spent on other liabilities.1

ROAD AHEAD IN HEAVY ENGINEERING CAPITAL GOODS

• The turnover of capital goods industry in India is estimated at US$ 70 billion in 2017 and is expected to grow to US$ 115.17 billion by 2025.

• Electrical equipment production is expected to reach US$ 100 billion by FY 2021-22 from US$ 27.3 billion in 2017-18.

• India’s engineering R&D market will increase from US$ 28 billion in FY18 to US$ 42 billion by FY22F.

• of construction equipment are expected to reach 90,115 in 2018 and 100,000 in 2022, respective- ly, while the market size of construction equipment industry is expected to grow from US$ 4.3 billion in FY18 to US$ 5 billion by FY20.

• Production of machine tools industry is forecasted to increase to Rs 9,000 crore (US$ 1.40 billion) in 2018-19.2

GOVERNMENT INITIATIVES

The Indian engineering sector is of strategic importance to the economy owing to its intense integration with other industry segments. The sector has been de-licensed and enjoys 100 per cent FDI.

• With the aim to boost the manufacturing sector, the government has relaxed the excise duties on gate tax, capital goods, consumer durables and . • In the Union Budget 2018-19, the government allocated US$ 92.22 billion for the infrastructure sector and US$ 45.57 billion for the defence sector. In addition, Make in India policy is being carefully pursued to achieve greater self-sufficiency in the area of defence equipment including air-craft.

• The Union Cabinet has approved incentives up to Rs 10,000 crore (US$ 1.47 billion) for investors by amending the M-SIPS scheme, in order to further incentivize investments in electronics sector, create opportunities and reduce dependence on imports by 2020.

• Government of India (GoI) has introduced the National Policy on Capital Goods 2016 which aims to treble production of capital goods and employment opportunities in the sector. 3

Major Key Players in Heavy Engineering – Capital Goods sector

S.no. Company Revenue (FY 18) Products

1 Larsen &Turbo US$ 18.79 billion Engineering and construction, , electrical and electronics

2 Bharat Heavy Electricals Limited US$ 4.60 billion Power generation, transmission, transportation

3 ABB India Ltd. US$ 1.42 billion , switch gears, control gears

4 CG Power and industrial Solutions US$ 0.97 billion Power generation and transmission Ltd. equipment

5 Engineers India Limited US$ 0.31 billion Highways and , mass rapid transport systems construction, specialist materials manufacturing

6 Kirloskar Oil Engines Ltd. US$ 0.49 billion Engines, Engine bearings and valves, grey iron casting

7 Cummins India Ltd. US$ 0.82 billion Power generation, construction and mining equipment, fire pumps and cranes, compressors

8 Thermax Ltd. US$ 0.71 billion Boiler, heaters, air and purification, absorption cooling

9 BGR Energy Systems Ltd. US$ 0.52 billion Boilers, turbines, generators

Source: - Report on Engineering and Capital Goods, IBEF January 2019 INDUSTRY RISK

Heavy industry is one of the key sectors of the world economy requiring a diverse range of options. Increasing globalization, tighter energy and environmental regulations, and ongoing technological are among the biggest challenges for this sector. Some of the key challenges that the heavy engineering industry faces are: Cost reduction, risk , productivity maximization, quick decision-making, adapting to new , process automation and so on.

Indian capital goods manufacturers have been facing competition from foreign players; particularly Chinese and Korean manufacturers since the onset of 11th five-year plan. Currently, despite increased domestic capacities, low cost foreign manufacturers still give tough competition to domestic manufactures in some segments of the industry.

Order size is the biggest determinant of the company's performance in engineering sector. In order to bag big contracts, companies need to have a strong balance sheet and proven execution capabilities. Companies in these sectors need huge working capital to execute bigger contracts. In most cases, they 4 receive only part payment at initial stages and the remaining comes as projects get executed.

FOOTNOTES

1. Heavy Engineering Corporation to spend Rs 2,300 crore over 3 years to revamp equipment (The Economic times, 14 March 2018) 2. www.ibef.org 3. www.ibef.org 4. Equity Master_ Engineering Sector Analysis report_February12, 2019 Infomerics Valuation And Rating Pvt. Ltd. SEBI REGISTERED / RBI ACCREDITED / NSIC EMPANELLED RATING AGENCY

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