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Overview of the Engineering Industry

In India continues to be one of the fastest-growing economies in the world, and is currently the centre of global attention. The role of the Indian engineering sector, which is one of the largest industrial sectors in the country, has been accentuated with the growing emphasis on infrastructure developments in India as well as global.

The engineering industry encompasses a wide range of products and can be primarily categorised into heavy engineering and light engineering segments.

Heavy Engineering

Heavy engineering goods account for bulk of the production in the engineering industry. Most of the leading players in the sector are engaged in the production of high-value heavy engineering products as these require high-end technology and are capital intensive in nature.

The following 19 industrial sub sectors are covered under this category:

Source: Department of Heavy Industries

Many of these sub industries have shown remarkable production growth in April-October 2006-07 as compared to April-October 2005-06.

Source: Department of IPP

Light Engineering

Light Engineering is yet another large segment, contributing to the industrial growth of the country. It is an intermediate segment, whose products are largely used as inputs in capital and heavy engineering industry. Unlike the heavy engineering segment, the light engineering goods segment uses medium to low-end technology. Being mostly labour intensive, the segment generates employment opportunities for skilled and semi-skilled labour. This segment is characterised by the dominance of small and unorganised players which manufacture low-value added products with small capacities.

The light engineering covers the following sectors:

Liberalisation of the FDI policy has also facilitated FDI inflows into various segments of the sector.

FDI Inflows in the Engineering Sector – Apr 2000 to Dec 2007

Source: Department of Industrial Policy & Promotion, Govt. of India

The exports of engineering goods increased from US$ 20.3 bn in FY06 to US$ 27.1 bn in FY07. Europe and Asia account for 50% of India’s total engineering exports, followed by the American countries.

Source: Engineering Export Promotion Council

Future Outlook

The Government of India has set a GDP growth target of around 9% for the Eleventh Plan Period. Development of world class infrastructure will play a crucial role in attaining and sustaining this target. We expect a healthy growth in the engineering sector on account of the Government’s increased thrust on infrastructure development. Fresh investments in the power equipment, metals, oil & gas, and petrochemicals industries, coupled with robust industrial activity is expected to drive the growth momentum in the capital goods industry in the near term.

Cluster Insights

Cluster Insights are aimed at highlighting the performance and expectations of the small and medium enterprises operating in the engineering sector in the Hyderabad cluster. The sample considered for this analysis are the engineering fi rms profi led in this publication; the variables considered for analysis include operational structure, business practices, and future plans.

Key Characteristics of the Hyderabad engineering cluster

• The average annual revenue growth of the profiled engineering companies over the past two years was 31%.
  
  
• 49% of the sample companies possessed quality certifi cations like ISO 9001: 2000 or TS 16949.
  
  
• The companies operated at an average capacity utilisation of 81%.
  
  
• 20% of the companies operated with two or more manufacturing facilities.
  
  
• 35% of the companies were involved in exports.
  
  
• Asia (excluding Middle East) is the most preferred export destination for the engineering companies.
  
  
• 48% of the companies manufactured and marketed branded products.
  
  
• The sustained growth of the cluster is evident from the distribution of companies in terms of year of incorporation. While 49% of the companies started operations prior to 1990s, 41% of the companies were established in the decade between 1990 and 2000, while another 10% commenced operations post- 2000.

Ownership Pattern

The ownership pattern of engineering companies is inclined towards private limited companies.

• Of the total private limited companies covered, 65% fall in the turnover bracket of Rs 10 - 100 mn, which is at the small end of the spectrum.
  
  
• In the last two years, partnership firms showed a revenue growth of 35% while the public limited companies reported 30% growth.

Sub-segment:

Most of the companies operate in the light engineering segment and fall in the turnover bracket of Rs 10 – 100 mn.

• 36% of the heavy engineering companies were involved in exports compared to 34% of the light engineering companies.
  
  
• Heavy engineering companies operated at an average capacity utilisation of 80%, while those for light engineering stood slightly higher at 81%.

Turnover Bracket

Turnover bracket of Rs 10 – 100 mn has the maximum representation among the profiled companies.

• Companies with a turnover range of Rs –10 - 100 mn operated at an average of 82% of their installed capacity.
  
• 24% of the companies with a turnover range of Rs 10 – 100 mn were involved in exports.
  
  
• For companies in the turnover bracket of Rs 100 - 250 mn and Rs 500 – 1,000 mn, Europe is the most preferred export destination.

Growth and Future plans

The companies expect an average revenue growth of 39% in the next two years.

• 14% of the companies have reported more than 50% revenue growth in last two years, where in majority of the companies fall in the turnover bracket of Rs 10 – 100 mn.
  
  
• 19% of the profi led companies expect more than 50% revenue growth in the next two years.
  
• Most of the companies have envisaged future plans. These include capacity expansion, entering into new markets and diversifi cation. Around 54% of the companies are planning for capacity expansion while 21% are looking forward to entering into new markets.

Cluster benefits and hindrances

Marketing initiatives, manpower training, funding from the financial institutions and adequate technology were the key benefits sighted for the companies in the sector. On the other hand, availing of government subsidies and labour issues were the major obstacles observed for the companies covered in the sector.