Sectoral Report on

AUGUST 2019

Authored by: Virtue Ventures

ENGINEERING SECTOR

2018

Industry Overview The Engineering sector in India is the largest and most diversified of all industrial

manufacturing sectors. It is a strategically important sector to the economy as the

output drives a broad base of industries acting as a critical input. The Indian

Engineering sector has witnessed a remarkable growth over the last few years

driven by increased investments in infrastructure and industrial production. The

engineering sector, being closely associated with the manufacturing and

infrastructure sectors, is of strategic importance to India’s economy.

The engineering sector is the highest contributor to India’s export basket,

accounting for around 25% of total exports by value. India has earmarked a target

of US$ 200 billion for engineering exports by 2025.

India on its quest to become a global superpower has made significant strides

towards the development of its engineering sector. 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. The Indian semiconductor industry offers high growth

potential areas as the industries which source semiconductors as inputs are

themselves witnessing high demand.

Segments in Engineering Sector Indian Engineering Sector can be broadly classified into following segments:

Engineering is a diverse industry with

various segments. A company from this

sector can be a power equipment

manufacturer (like transformers and

boilers), execution specialist for

Engineering, Procurement and

Construction (EPC) projects or a niche

player (e.g.: providing environment

friendly solutions like waste water and air

pollution treatment plants). The company

can also be an electrical, non-electrical

machinery or static equipment

manufacturer too.

As it incorporates diverse segments of

industry which can be broadly divided

into two segments, namely, heavy

engineering and light engineering. It is

relatively less fragmented at the top, as

the competencies required are high,

while it is highly fragmented at the lower

end (e.g. unbranded transformers for the

retail segment) and is dominated by

smaller players. The engineering

industry in India manufactures a wide

range of products, with heavy

engineering goods accounting for bulk of

the production. Most of the leading

players are engaged in the production of

heavy engineering goods and mainly

produces high-value products using

high-end technology.

MachineTools

Process Machinery

Heavy Electrical & Power Plant Equipment

Metallurgical Machinery

Textile Machinery

Engineering Tools

Die, Moulds and tools

Market Size

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. Likewise, electrical equipment

production is expected to reach US$ 100 billion by FY 2021-22 from US$ 27.3 billion in

2017-18. The electrical equipment industry grew 13.7 per cent year-on-year during April

2018-January 2019.

Comparative advantage vis-à-vis peers in terms of manufacturing costs, market

knowledge, technology and creativity has been a driving force for engineering exports

from India. India’s engineering exports reached an all-time high in FY19, surpassing the

US$ 80 billion mark. Engineering exports grew 6.32 per cent year-on-year to US$ 81.02

billion in FY19. Engineering exports reached US$ 6.49 billion in April 2019.

As of 2017, India was the world’s eighth largest consumer of machine tools globally.

Production of machine tools in the country grew 25.7 per cent y-o-y to Rs 7,293 crore

(US$ 1.13 billion) in 2017-18, while exports reached Rs 355 crore (US$ 55.08 million).

Production is forecasted to increase to Rs 9,000 crore (US$ 1.40 billion) in 2018-19.

Construction equipment industry recorded sales of 98,204 and 78,109 units of

construction equipment in 2018 and 2017, respectively. Construction equipment sales

are expected to grow further to 110,815 units by 2022. Construction equipment market

is projected to reach US$ 5 billion by FY20 from around US$ 4.3 billion in FY18.

Companies engaged in the engineering sector are virtually on a roll. Capacity creation

in sectors like infrastructure, power, mining, oil & gas, refinery, steel, automotive, and

70

115

0

20

40

60

80

100

120

140

2017 2025F

Capital Goods Turnover (in USD Billion)

0

20

40

60

80

100

120

2017 2022

Electrical equipment Production (in USD Billion)

consumer durables has been driving demand in the engineering sector. Separately, the

approval of significant number of special economic zones (SEZs) across the country

and the development of the Delhi Mumbai Industrial Corridor (DMIC) across seven

states is expected to further bolster the engineering sector.

With 100 per cent Foreign Direct Investment (FDI) allowed through the automatic route,

and initiatives like ‘Make in India’, major international players have entered the Indian

engineering sector due to significant growth opportunities available. Miscellaneous

mechanical and engineering industries have received FDI inflows worth US$ 3.58 billion

during April 2000 to March 2019.

Export Advantage

Engineering exports from India grew

16.8% to US$ 76,204.4 million in FY18

from US$ 65,239.2 million in FY17.

Exports grew 11.2% year-on-year to

reach US$ 46.4 billion during Apr-Oct

2018.

During FY08–FY18, engineering

exports from India registered growth at

a CAGR of 7.61%

Engineering exports include transport equipment, capital goods, other

machinery/equipment and light engineering products such as castings, forgings and

fasteners.

Several companies in the engineering sector have diversified, either geographically

(mainly to Middle Eastern countries) or sector-wise. BHEL plans to foray into Ukraine,

Simplex Infra has moved to the Middle East, Larsen and Toubro (L&T) has diversified

into power equipment manufacturing, Thermax entered the power utility segment.

33.7

40.5

32.6

49.8

58.6 56.861.6

70.6

58.8

65.261.9

0

10

20

30

40

50

60

70

80

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

India's Engineering Export (USD Billion)

USD Billion

CAGR: 7.61%

20%

19%

17%

13%

11%

10%

9% 1%

Export Performance of Principal Commodities

(FY20) Iron & Steel and Products made of Iron& Steel

Automobile

Industrial Machinery

Ships, Boats and Floating products andparts

Other Engineering Products

Electrical Machinery

Non-Ferrous Metals & Products madeof Non-Ferrous Metal

Aircraft & Spacecraft parts andproducts

Porter Five Force Analysis

Threat of Substitute Product: LOW ✓ Threat is low because of the nature of the industry

✓ Even if the buyer wants to revamp or renovate its existing stock, it is

likely to go to the same players

Competitive Rivalry: HIGH ✓ Competition is intense among major players

✓ Companies basically compete on pricing, experience in a particular

field, product quality, and capability of handling projects

✓ Small companies are also trying to revamp their scale and size

Bargaining Power of Suppliers: MODERATE ✓ Bargaining power of suppliers is low due to cut-throat competition

✓ Suppliers have a strong hand in the high-end technology segment

Bargaining Power of Buyer: MODERATE to HIGH ✓ Bargaining power in tech- oriented segments is low

✓ Competition in power generation and T and D equipment sector gives

bargaining power

Threat of New Entrant: LOW ✓ Threat is low considering the capital-intensive nature of the industry

and reputation attached to the existing players

Investment Landscape The engineering sector in India attracts immense interest from foreign players as it enjoys a

comparative advantage in terms of manufacturing costs, technology and innovation. The

above, coupled with favorable regulatory policies and growth in the manufacturing sector has

enabled several foreign players to invest in India.

The Foreign Direct Investment (FDI) inflows into India's miscellaneous mechanical and

engineering industries during April 2000 to March 2019 stood at around US$ 3.58 billion, as

per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).

In the recent past there have been many major investments and developments in the Indian engineering and design sector:

As of December 2018, SANY India, the Indian arm of Beijing-headquartered

construction equipment maker SANY Group, is planning to invest Rs 1,000 crore

(US$ 142.49 million) to expand its construction machinery production capacity to

25,000 units.

Schneider Electric and Temasek acquired Larsen & Toubro’s (L&T) electrical and

automation business in May 2018.

India allows 100% FDI in Capital Goods Industry.

Major Investors

Major

Recent

Investments

As of December 2018, SANY India, the Indian arm ofBeijing-headquartered construction equipment makerSANY Group, is planning to invest Rs 1,000 crore (US$142.49 million) to expand its construction machineryproduction capacity to 25,000 units.

Schneider Electric and Temasek acquired Larsen & Toubro’s (L&T) electrical and automation business in May 2018.

Policy Support

Make In India

To integrate major capital goods sub-sectors like machine tools, textile machinery, earthmoving

and mining machinery, heavy electrical equipment, plastic machinery, process plant

equipment, dies, moulds and press tools, printing and packaging machinery and food

processing machinery as priority sectors to be envisaged under 'Make in India' initiative.

Creation of HIEMDA

To create an enabling scheme as a pilot for 'Heavy Industry Export & Market Development

Assistance Scheme (HIEMDA)' with a view to enhance the export of Indian made capital goods.

Increased Budget Allocation to Existing Schemes

The policy recommends increasing the budgetary allocation & scope of the present 'Scheme

on Enhancement of Competitiveness of Capital Goods' which include setting up of Centers of

Excellence, Common Engineering Facility Centers, Integrated Industrial Infrastructure Park

and Technology Acquisition Fund Programme

Start-up Center for Capital Goods Sector

To create a 'Start-up Center for Capital Goods Sector' shared by DHI and CG industry/industry

association in 80:20 ratio to provide an array of technical, business and financial support

resources and services to promising start-ups in both the manufacturing and services space.

Mandatory Standardization

It includes, inter alia, defining minimum acceptable standards for the industry and adoption of

International Organization for Standardization (ISO) standards in the absence of other

standards, to institute formal development program for promoting and framing Standards with

Standards Developing Organizations (SDOs) including Bureau of Indian Standards (BIS),

international standard bodies, test / research institutions and concerned industry/ industry

associations.

Opportunities

Infrastructure

Government of India aims to build 150-200 low cost airports in next 15-20 years, to boost its

regional air connectivity. This will produce a tremendous opportunity for engineering sector for

production.

Construction & Real Estate

Under the Governments initiative ‘Housing for All’ which aims to provide affordable house for

all by the year 2022. Under this scheme, affordable houses will be built in selected cities and

towns using eco-friendly construction methods for the benefit of the urban poor population in

India. Construction of more than 100 million houses will help engineering industry to grow with

more pace.

Energy Energy sector is growing with the CAGR of 7%. Increasing sanctions of projects in renewables

and power sector has boost the demand of raw material requirement. Also, government

scheme like ‘Power for All’ has further increased the demand of engineering parts and capital

goods.

Capacity Creation Capacity creation in sectors such as infrastructure, power, mining, oil & gas, refinery, steel,

automotive, and consumer durables driving demand in the engineering sector.

Road Ahead

Turnover of capital goods industry is expected to increase to US$ 115.17 billion by 2025F.

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

FY22F. Sales of construction equipment are expected to reach 90,115 and 100,000 in 2018

and 2022, respectively, 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.

Larsen & Toubro

Products: Engineering and Construction

Electrical & Electronics

Bharat Heavy Electrical Ltd.

Products: Power Generation Equipments

Transmission Equipments

Siemens India Ltd.

Products: Power Generation Equipments

Transportation System

Communication & Healthcare

Equipments

ABB

Products: Transformers

Switch Gear

Control Gear

Havells

Products: Fast Moving Electrical Goods

Kirloskar

Products: Engines

Engine Bearing & Valves

Other Engine Parts