Engineering Sector

Engineering is a diverse industry with a number of segments. A company from this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist or a niche player (like providing environment friendly solutions). It can be an electrical, non-electrical machinery and static equipment manufacturer too. |  | Order book size determines the performance of the company in the short to medium-term. In order to bag big contracts, companies need to have a big balance sheet size and proven execution capabilities. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes as projects get executed. |  | Many tariffs that earlier offered protection to Indian capital goods manufacturers, have been removed or reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition. There have been numerous instances in the recent past where Chinese equipment manufacturers (especially in power generation) have snatched away orders from Indian companies due to the pricing advantage. |  | Power sector contributes the largest to the engineering companies' revenues. For instance, as of the latest fiscal year end, ABB and BHEL derive roughly 53% and 79% of their revenues from supplying equipments to the power sector. And with the government planning to add large-scale generation capacities in view of the paucity of power in the country, the potential seems huge for the engineering majors in both generation and the transmission & distribution space. |  | Infrastructure is another key area of operation for major Indian engineering companies. L&T's order book at the end of FY11, for example, contained around 36% of orders from the infrastructure sector which includes activities like engineering, design and Engineering of industrial projects and social & physical projects like housing,