Engineering Sector : Restructured For Growth

Post the pandemic-driven slowdown, engineering companies in India are now working hard towards increasing both their domestic and global footprint. Meanwhile, several government initiatives and the need for infrastructure development is providing a huge boost to this sector. In this article, Shreya Chaware highlights the key trends and prospects of engineering sector. 

Being one of the largest sectors in India, the engineering sector can be broadly categorised into two parts, namely, heavy engineering and light engineering. India’s engineering industry accounts for 27 per cent of the total factories in the industrial sector, representing 63 per cent of the overall foreign collaborations. The total merchandise exports also comprise a large contribution from the engineering sector. Capacity creation in infrastructure, power, mining, oil and gas, refinery, steel and consumer durables are driving demand in the engineering sector. The sector bears a comparative advantage in terms of manufacturing costs, market knowledge, technology and creativity. 

Rising competition is leading the domestic players to focus on improving their capabilities, becoming more quality-conscious and upgrading their technology base in line with global requirements. There are more than 2,500 firms with ISO 9000 certification in this sector. Engineering companies are striving to increase their global footprint. Availability of cheap labour is giving them an edge over companies in higher-wage economies. Besides targeting developed economies across Europe and North America, Indian companies are currently diversifying in the developing markets of Africa, South America and the Middle East. 

Impressive Track Record

India’s engineering sector has witnessed remarkable growth over the last few years, driven by increased investment 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. 

Market Size

The global engineering services’ outsourcing market size is expected to expand at a compound annual growth rate (CAGR) of 24.6 per cent from 2022 to 2030. The improving association between engineering service providers (ESPs) and original equipment manufacturers (OEMs) can be one of the drivers underpinned by the increase in the acceptance of engineering services outsourcing (ESO). The global research and development, rising demand for incorporating highquality technologies in the product offerings and the crucial need to shorten the product lifecycles along with slicing costs are also anticipated to contribute to market growth. 

The substantial inclination of customers to outsource different services in order to reduce costs has led towards the constant growth of the ESO market. Also, the increasing need for automation tools in the available system architecture will open enormous opportunities for ESPs. On the other hand, the new players may find it tough to root the footprint in the ESO market owing to lack of project expertise, technology expertise and business operations. Also, global digitisation displays cybersecurity issues.

Engineering Stocks

In the engineering sector, private capex cycle is accelerating in a big way with most companies undergoing expansion and the fact that India hasn’t seen a strong capex cycle in the last 6-7 years. Observing the performance of the engineering stocks in 2022, so far, the returns have rallied up to 1,400 per cent, massively beating the benchmark indices. Out of the data we extracted, around 7 per cent of companies have doubled the investors’ returns in approximately nine months of 2022. Starting the year trading at ₹ 2.84, Alliance Integrated Metaliks is currently trading at ₹ 44. The other stocks in the list have also provided attractive returns in 2022. The following table highlights the top 15 companies according to the returns delivered by them in 2022, so far.

Whereas, if we look at the data for the past year, there is only one stock that has turned out to be a multi-bagger. Gensol Engineering is garnering all the limelight on D-Street for delivering superlative returns of 2,400 per cent returns in a span of just one year. The future plans of the company with respect to electric vehicles (EVs) are likely to boost the company’s outlook on the revenue front in the future. The company expects revenue in FY24 to jump four-fold to ₹ 500-600 crore from ₹ 160 crore reported in FY22. 

Moreover, the company also expects the top-line to grow by ₹ 2,000 crore by FY25 on the back of a strong pipeline of launches. After Gensol Engineering, from the list of top 15 companies on a one-year basis, the shares of other construction and engineering companies have bagged returns between 200 per cent and 800 per cent, making investors cheerful. The following table summarises the top performing engineering stocks on a one-year basis:

If we arrange the stocks according to the highest market capitalisation, the performance portrayed by some of the popular engineering and construction companies is mixed. On a YTD basis, apart from GRM Infrastructure, GR Infraprojects and KEC International, the other companies were able to record positive returns. On the other hand, in the past year, only GR Infraprojects has recorded lower returns as compared to other major companies. The table alongside shows the performance of large engineering and construction companies in 2022, so far and over the past one year:

Key Trends in Engineering 

The engineering sector acts as an efficient sponge in absorbing new technology. As and when updated technology becomes available and new possibilities can be visualised, changes can be seen from the initiation of designs to the management objects. The trends that can be seen shaping the future of the engineering sector are:

◼ Digital Twins — A digital twin can be defined as an exact replica of an object in the physical world, consigned digitally. The engineers get a detailed insight into the performance by placing sensors on and around the physical objects.

◼ Virtual Site Inspection — The trend has been accelerating since the pandemic and the widespread need for more remote work and less in-person contact. The industry has discovered that virtual measures can also ease inspections along with improving safety and maintaining quality.

◼ 3D Printing— 3D printing has rewired the nature of engineering. It provides a new perspective to manufacturing parts for use in projects ranging from components of airplanes and automobiles to the basic structure of ‘printed’ homes.

◼ Sustainability — Along with the design and functioning trends, another important aspect of the engineering sector is sustainability. Engineering and construction industries are fairly responsible for a fair amount of waste and pollution. The industry would be paying keen attention towards green engineering principles such as effective resources.

◼ Deployment of AI and Robotics — There is rapid advancement of AI and robotics along with countless potential benefits for the engineering industry in the process. These technologies play a crucial role to analyse projects, generating solutions, monitor materials, and sometimes even carry out physical engineering projects in a way that makes humans’ jobs safer and simpler 

We had a look at the quarterly performance for June 2022 of the top three companies according to market capitalisation, namely, Larsen and Toubro, Bharat Electronics and Thermax. Larsen and Toubro reported a consolidated total income of ₹ 36,547.92 crore, which was down -31.51 per cent from the previous quarter but up 21.90 per cent from last year’s same quarter. PAT increased 44.9 per cent on a YoY basis whereas it dipped 53 per cent on QoQ basis. For BEL, a ‘Navratna’ defence PSU, the order book position of the company stood at ₹ 55,333 crore as of June 22 end. 

Order inflow during Q1FY23 stood at ~₹ 870 crore. The company has maintained its revenue growth guidance of 15 per cent and EBITDA margin guidance of 21-23 per cent for FY23E. Orders inflow during the year are expected at ₹ 18,000-20,000 crore. For Thermax Ltd., the order backlog stands at ₹  9,554 crore whereas the order intake expectations were high given strong enquiry inflow from the refinery, steel, power and chemical segments. Out of total order inflows of ₹ 2,310 crore, energy sector orders zoomed by 40 per cent on an YoY basis to ₹ 1,758 crore. 

Environment orders increased by 35 per cent to ₹ 404 crore while chemicals orders increased at a slower pace of 5 per cent. In FY22, on an overall basis, our coverage universe of the engineering sector has reported reasonable FY22 performance on the back of economic revival by garnering a strong order pipeline while the margins were largely supported by pass-through of raw material cost to customers. Capacity expansions will lead to growth in the near-term to mid-term. 

Outlook:

The engineering sector is anticipated to benefit from the increased budgetary allocation for infrastructure and PLI launched in the textile and automotive industries. The sector has been de-licensed and enjoys 100 per cent FDI. Engineering companies centred around ethanol and homegrown defence equipment will garner the benefits that will flow from the governmental push to these industries. The ‘Make in India’ initiative and the government’s focus on ease of doing business is likely to present several opportunities in the engineering and capital goods sector in the upcoming years. The drive for growth in the budget and PLI as well as increased capital expenditures in steel, chemicals, pharmaceuticals, components, cement and automotive may signal the beginning of a multi-year capex cycle. As such, the sector outlook appears positive.