This shift will provide diversification and scale but help garner higher margins and ensure sustainability for many of these companies as the competitive landscape changes
Capital expenditure in the power and ancillary sectors such as transmission and distribution (T&D) were the key growth drivers for most engineering companies in India. However, the landscape is now witnessing a radical change, with many companies, like Bharat Heavy Electricals (BHEL), forced to tweak their business model. BHEL’s dependence on generation-led capex was very high. Now others in the value chain like ancillaries are facing the heat.
In Q2 FY19, capex from Power Grid Corporation of India (PGCIL) and generation companies has halved on a year-on-year basis. Companies such as GE T&D India are now focusing on low voltage products, which are typically required in state transmission projects.
Like GE T&D, a slew of other large engineering companies, including Siemens, which were reaping the benefit of capex from PGCIL and central government projects, are increasingly looking at state transmission capex, which is swiftly picking up.
Another important shift, which is taking place in the engineering space, is changing the power generation mix. ABB India has already started working on new kinds of products and solutions that can integrate different kinds of power generated from different types of energy sources such as solar and wind.
Most companies, including ABB and GE T&D, are suggesting that the future power generation mix will be tilted more towards renewables, which is already getting reflected in the ordering of new projects.
To make sure that growth in the long run does not suffer, companies have started looking at new technologies and solutions. GE T&D has committed to increasing its exposure to renewables (currently 5 percent of sales) in the coming year.Smart technology and digital solutions
ABB has been the front-runner and restructuring its product portfolio for quite a while now, exiting a few segments like rural electrification that were a drag on its financials.
Companies like ABB and Siemens have forayed into industrial automation quite early. Sectors such as the automobile, food processing, pharmaceuticals and many others are relying on automation including robotics. Small and medium enterprises have joined the wave.
Industry data suggests that about 42 percent of SMEs in India have digitally enabled processes and about 23 percent of them seen to have integrated Internet of Things (IoT) in their business processes.
No wonder companies like ABB generate close to 24 percent of their revenue from robotics and motion as against 21 percent about a year ago.
Smart cities and smart solutions are on the anvil for these companies. ABB recently showcased its electric vehicle charging solutions. Vehicles can be charged in about 8 minutes and run for 200 kms.Domestic players behind the curve
While global players have their own advantage in terms of the global know-how, some domestic companies seem to have missed the bus and are losing to competitors.
Companies like BHEL have completely lost out on this count and have been reporting losses in past years. The BHEL stock is now trading at a 14-year low and the company has turned out to be the biggest wealth destroyer as opportunities in the generation space dry up.
As a strategy, it is now developing a propulsion system for EVs and technologies that can support conversion of coal to methanol. It is also collaborating with global technology leaders such as Indian Space Research Organisation (ISRO) for lithium-ion cells and Kawasaki Heavy Industries for stainless steel metro coaches. It is now looking to diversify into renewables, defence, aerospace and water. However, given BHEL’s excessive dependence on the boiler and turbine market, changes in product mix now could prove to be too little and too late.
A similar dilemma is being faced by Lakshmi Machine Works, which was earlier known as a pure textile machine manufacturer. It has started developing advanced technologies, catering to critical engines and structural parts and metal components required by the national and international aerospace original equipment manufacturers. This particular business saw a fourfold jump in assets employed in the past 12 months. Moreover, this segment saw sales double during the quarter-ended September.Long-term outlookChange is the need of the hour and companies, which had an excessive exposure to the single segment, are now looking to broad base their portfolio in light of the fact that the Indian market is opening up for different kinds of opportunities that never existed. This shift will provide diversification and scale but help garner higher margins and ensure sustainability for many of these companies as the competitive landscape changes.Moneycontrol Research page