Engineering Sector: Leveraging India's economic perspective

Engineering Sector: Leveraging India's economic perspective

Market Outlook
by 5paisa Research Team Last Updated: 2022-07-20T22:10:22+05:30

Here's a performance analysis of one of the most critical sectors driving the Indian economy.

India's engineering sector has experienced tremendous growth over the past few years as a result of increased investments in industrial production and infrastructure. It is a significant component of the manufacturing PMI Index and has shown revival in the post-pandemic period.

The PMI Index has been comfortably over 50 since the start of 2022, indicating an economic resurgence. However, the industry has faced significant challenges as a result of the Russia-Ukraine conflict, which has increased inflation globally, driven up oil prices to over USD 100 per barrel, fluctuated commodity prices, disrupted supply chains, and Covid-induced lockdowns in China's manufacturing and trade hubs.

Nevertheless, the Indian economy as a whole and the engineering sector, in particular, had handled these challenges well. Engineering makes up a sizable portion of Indian industries, and the Index of Industrial Productivity (IIP) for April'22 came in at 7.1% (March'22 was 2.2%), demonstrating an improvement across industrial sectors. In Q4FY22, IIP capacity utilisation was reported at 74.5% compared to 72.4% in Q3FY22 showing signs of recovery.

Outlook

The sector has been de-licensed and enjoys 100% FDI. The engineering sector is anticipated to benefit from the increased budgetary allocation for infrastructure and PLI launched in the textile and auto industries.

The recent collapse in commodity prices would also provide some respite to the business. Engineering companies focused on ethanol ( Praj Industries) and homegrown defence equipment (BEL) will garner the benefits that will flow from the governmental push to these industries.

With the drive for growth in the budget and PLI as well as increased capital expenditures in steel, chemicals, pharma, components, cement, and auto that may signal the beginning of a multi-year capex cycle, the sector outlook appears positive.  

Financial Performance

From our universe of 32 companies in the engineering sector, On account of improved capacity utilisation, cost optimization, gaining market share (backward and forward integrations), and better customer negotiating, larger enterprises were able to demonstrate a decent to high growth in their operating profits. Like most other sectors, the engineering industry faced Supply chain constraints, delays in dispatches and inflationary run-up in commodity prices, which impacted the growth of their topline

BEL, a Navratna Defense PSU, reported a solid performance against the backdrop of growing attention to defence equipment. The company received orders worth Rs 19,200 crore in FY22, and as of March 2022's end, it had a backlog of orders totalling Rs 57,570 crore. With Rs 15,084 crore in net revenue for FY22, the order backlog is 3.8 times the realised revenue. Thermax experienced strong top-line growth, but was challenged by rising freight and commodity costs. Thermax also has a strong 20% order pipeline increase that is due to both volume and price growth. The top provider of corrosion-resistant glass-lined equipment, GMM Pfaudler, continued to exhibit exponential development in its topline, increasing by 154%.

Praj Industries reported an increase in net sales of 78%. The rise in operating profit showed a trend that was relatively similar to the rise in net sales. The operational profit increased by 79% for GMM Pfaudler and 67% for Praj Industries, respectively. The greatest increase in net profit was 85% at Praj Industries. Despite a 21% increase in the top line, Triveni Engineering's bottom line had exponential growth of 182%. In FY22, the company had a growth of 57% in domestic enquiry generation and a growth of 25% in overseas enquiry generation.

AIA Engineering Ltd is the second largest hi-chrome producer in the world. Net realisations per tonne increased 38% to Rs 147.9 per kg YoY, owing to product mix and price increases using pass through of the increase in ferro chrome prices on to the customers. Net revenue driven by higher realisations and volume growth was up by 22%. The operating profit and net profit however grew by 9.5% and 5.5% respectively. With the order book standing at Rs 502 crore and brownfield expansion plans of Rs 200 crore, the company is focused on accelerated growth.

Overall, our coverage universe of the Engineering sector has reported reasonable FY22 performance on the back of economic revival garnering a strong order pipeline, margins were largely supported by pass-through of raw material cost to customers, and capacity expansions will lead to growth in the near to midterm.

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About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

Disclaimer

Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.

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