“CII-Valcon report on Engineering Industry in Punjab - making the big leap forward” was released at the event 'Destination Punjab 2012', Ludhiana, held from 1-3 Nov at Ludhiana, Punjab (India). The report focuses on the emerging opportunities in the sunrise engineering sectors and also an assessment of how Punjab’s companies can gain from this.

1. Engineering Industry in Punjab
making the big leap forward
2012
CII – Valcon Report

2. Message by Mrs Kamna Raj Aggarwalla
Chairperson, CII Destination Punjab 2012
It is my proud privilege to present CII Valcon report on “Engineering Industry in
Punjab – Taking the Big Leap Forward” at the 2nd Edition of Destination Punjab
– An Industrial & Engineering exposition. The report and this event is part of our
endeavour to showcase to the world, the tremendous potential & promise that
engineering sector in Punjab holds.
CII and Valcon through this report have tried to come up with a holistic approach
and practicable solutions which would help create capacity and also bring in
concepts of competitiveness & automation that will help engineering sector
gain momentum to become the true growth driver of our economy.
While Destination Punjab 2012 seeks to provide a rare perfect platform to the
engineering sector in Punjab to explore boundless opportunities which will help
foster new partnerships & engineer profits.
I would like to convey my sincere gratitude to Government of Punjab, Valcon
Mrs Kamna Raj Aggarwalla
Management Consulting and my dear friends from Industry as also our
Chairperson, CII Destination
exhibitors, buyers, sponsors and other stakeholders, who have supported us in
Punjab 2012
this endeavour of reenergizing the engineering sector in the state.
Wishing everyone a meaningful and productive Destination Punjab.
2

3. CII – Valcon Report
Message by Ms Sandeep Riat
Chairperson, CII Ludhiana Zonal Council
It is a matter of great privilege for me to extend a very warm welcome to all the
stakeholders & participants of the 2nd edition of Destination Punjab being
organized at Ludhiana.
Our focus in this years’ edition is to revive & reenergize the engineering sector
in the state by showcasing the potential and opportunities existing in this sector
to our business fraternity across the country & globe.
As Ludhiana has traditionally been known as the hub of engineering
entrepreneurship in this region & country, through Destination Punjab 2012 we
have also endeavored to expose local entrepreneur to newer clients, latest
technologies & practices through a focused exposition and concurrent sessions
with experts and leaders from industry.
Besides these, CII & Valcon Management Consultants have together compiled a
report which highlights the tremendous opportunities waiting to be tapped in
Ms Sandeep Riat
engineering sector in the state. I am sure our stakeholders will find this report
Chairperson, CII Ludhiana Zonal
informative & useful.
Council
I would also take this opportunity to thank the state Government and other
stakeholders who have put in their sustained efforts and helped us in building a
successful Destination Punjab 2012.
Wishing everyone a pleasant & fruitful stay at Destination Punjab 2012,
Ludhiana.
3

4. Message by Mr Deepak Mittal
Chairman, CII Punjab State Council
On behalf of CII Punjab State Council, I take this opportunity to personally
welcome you all to the 2nd edition of Destination Punjab at Ludhiana.
After successfully organizing the 1st edition in Amritsar last year, this time we
have adopted a more focused approach to highlight the strengths &
opportunities existing in the engineering sector in the state.
At Destination Punjab 2012, besides an exposition, an extensive schedule of
Knowledge Sessions, Vendor Development Programs and a Conference on
Automation have been scheduled over a period of 3 days which I am sure would
help our business fraternity to expand its horizons by interacting with their
prospective partners besides learning newer concepts, technologies & practices.
I am also delighted to share that CII and Valcon Management Consultants have
compiled a holistic report which aims to provide a bird’s eye view of the
tremendous opportunities that exist for engineering Industry in Punjab as also it
Mr Deepak Mittal
suggests the way forward to realize the full potential of this sector in the state.
Chairman, CII Punjab State
Council This momentous effort would not have been possible without the unflinching
support provided by Government of Punjab, colleagues from Industry and other
stakeholders in this endeavour. I thank each and every one for their contribution.
Wish you all a very fruitful Destination Punjab 2012.
4

5. CII – Valcon Report
Message by Mr Krishnan Naganathan
CEO, Valcon Management Consultants
The engineering sector in Punjab is going through a tough phase – challenging
business environment coupled with traditional working style is a double
whammy for many of the home grown companies. Growth – in these conditions
– is possible only through a holistic approach of analysing the status quo, taking
steps to consolidate and diversify and leveraging the strengths to tap the
potential in this sector.
In this backdrop, I believe that there could not have been a better time than now
to present this report to the industry. This report by Valcon and CII attempts to
create a holistic view of the current status of Punjab’s engineering industry and
its growth vis-a-vis the Indian engineering sector. Further, we have also provided
the possible way forward for Punjab’s engineering industry to make the next big
leap forward.
This report also highlights the sunrise sub-sectors in the industry with long term
potential that are likely to emerge as key drivers for the engineering sector. The Mr Krishnan Naganathan
potential of the various sub sectors has been looked into both in terms of CEO, Valcon Management
profitability and return on investment, thus providing a quantified assessment Consultants Pvt. Ltd
for the reader. The objective has been to make the reader aware of the emerging
opportunities and possibly trigger interest for further study and action.
We have also tried to identify and understand the strengths of Punjab’s
companies that have helped them survive and fend off challenges as also their
weaknesses that have kept them from growing faster. Our learning has been
complemented by views of industry experts and by Valcon’s view points on
leading practices that needs to be implemented to ride the next curve of growth.
As is the case in any study, the views expressed pertain primarily to majority of
the population studied. We realise that there are a number of companies who
stand out from the general and have outperformed others. In many ways, these
companies also set examples of the good practices to be emulated by others.
With a strong domestic market, untapped export potential and large
infrastructure investment plans by the government, there is an immense growth
opportunity waiting for the companies. I hope that CII and Valcon’s attempt in
sharing the collective insights benefit the readers and enables the sector to
drive long term growth in this sector.
In short: Taking you further.
5

6. Table of contents
Punjab’s economy 7
Engineering sector and its relevance to growth of Punjab’s
economy 8
Opportunities in engineering sector 11
Engineering sector overview in India 11
Classification of engineering sectors 11
Engineering sub-sectors 15
Medical equipment 15
Farm, construction and mining machinery 17
Metal fabrication 21
Industrial equipment and components 23
Auto components 27
Aerospace and defence - Sunrise sector with strong long term potential 32
Overall sector outlook 32
Potential for Punjab’s engineering industry 33
Strengths and weaknesses 33
Capability assessment 38
Skills 40
Marketing capabilities43
SWOT analysis of Punjab’s engineering industry 46
Key success factors for growth 48
Hurdles and roadblocks 49
Valcon’s view 50
Information sources acknowledgements 52
About CII About Valcon 53
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7. CII – Valcon Report
Punjab’s economy
Demographics: Punjab has been one of the richest states in India since
independence. With a population of approximately 2.8 crores1 spread over a
fertile area of 50,362 km2 Punjab today is not only responsible for 15% of India’s
wheat and rice production2 but also contributes 2.5% of India’s industrial output.
Size and growth: The net industrial production in Punjab is nearly INR 30,000
crores. While agriculture and allied activities contribute 31% of state’s domestic
product (2009-10), industrial activities and services contribute nearly 18% and
51% respectively. The annualised growth in these sectors for last five years had
been 13.1%, 18.7% and 16.3% respectively indicating growing prominence of
industrial activities in overall economy of Punjab4.
Figure 1: Growth trends for components of economy in Punjab
100
State domestic product in Rs 1,000 Cr at current prices
90
80
70
60
50
40
30
20
10
0
2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10
Industry Agriculture Services Industry growth trend
Major industrial sectors: Registered factories contribute 56% of the
industrial output in Punjab. They accounted for around INR 17.5 thousand crores
of gross value added in 2009-105. The major industry contributing to this output
was engineering, accounting for 41% of gross value added while textiles,
leather and apparels accounting for another 21%.
1
Provisional Population Totals at a Glance Figure : 2011: Punjab (Census of India)
2
RBI Handbook of Statistics 2011
3
Annual Survey of Industries 2009-2010
4
RBI Handbook of Statistics 2011. Growth rates have been calculated on Current Prices
5
RBI Handbook of Statistics 2011 and Annual Survey of Industries 2009-10 Average 7

8. Engineering sector and its relevance to
growth of Punjab’s economy
Figure 2: Share of total output by industry sectors in Punjab
22.9% Engineering
26.4% Textiles leather
Food beverages
Chemicals pharmaceuticals
Others
8.4% 22.4%
20%
Source: Annual Survey of Industries 2009-2010
Engineering sector is a major contributor to the economy of Punjab. Over the last
decade (2000 to 2010) it has grown at 16.4 % annually (CAGR). Today, while it
represents about 23% of total industrial output of Punjab it only forms 2.9% of
engineering industry contribution at the national level. This is in contrast with
engineering output from neighbouring states like Haryana and Uttarakhand
which share some of the same geographical advantages and disadvantages as
Punjab but have raced ahead due to supportive industrial policies, availability of
suitable infrastructure and better industrial climate in these states.
Figure 3: Engineering sector contribution from Indian states 2012
2.4% 2.4%
11.6% 2.9%
3.2% West Bengal
4.7% Rajasthan
Punjab
6.9% Andhra Pradesh
21.2%
Uttarakhand
7% Karnataka
Uttar Pradesh
Gujarat
7.9% Haryana
Tamil Nadu
17% Maharashtra
12.6%
Others
Source: Annual Survey of Industries 2009-2010
In the last decade (2000 to 2010) the growth in Punjab’s engineering industry
has been behind the national average of 17.0% (CAGR)6. Nevertheless it has
6
CAGR (Compounded Annual Growth Rate) is the constant annually compounded rate of growth which would
lead to output in 2010 starting from the respective industrial output in year 2000. These rates have been
calculated using data from Annual Survey of Industries 2009-2010.
8

9. CII – Valcon Report
been responsible for a big proportion of the industrial growth in Punjab in past
10 years due to its relative size. ƒƒ While engineering sector
accounts for nearly 23% of
More than 90% of the engineering Industry output from Punjab is from three Punjab’s industrial output,
subsectors. Automotive and auto components have the largest contribution with its share is a meagre 2.9%
large number of component manufacturers supplying to OEMs around Delhi and amongst all states
in Uttarakhand. Several of the components manufacturers also supply to the ƒƒ Engineering industries in
local tractor and farm equipment industry (classified under special purpose nearby states like Haryana
machinery). Profitability of the sector is relatively poor with average profits being and Uttarakhand are seen
5% of total industrial output. to be doing better than
Punjab in their contribution
Figure 4: Respective size of engineering related industries in Punjab
to national output
Aerospace defence ƒƒ Most of engineering
5.63% 0.78%
4.88% Medical equipment industrial output in Punjab is
2.98%
0% 0.03%
Automotive auto components from low margin industries
Castings, forgings fabrication
38.26% Special purpose machinery
21.71% Industrial equipment components
Consumer electrical electronic eqpt.
including appliances
Industrial electrical electronic eqpt.
Heavy vehicles transportation
25.74%
Source: Annual Survey of Industries 2009-2010; Valcon analysis
Figure 5: Respective profit contribution of engineering related industries in Punjab
2.11% 0.35% Aerospace defence
6.82%
Medical equipment
2.63%
27.67% Automotive auto components
0% 0.03%
Castings, forgings fabrication
Special purpose machinery
Industrial equipment components
Consumer electrical electronic eqpt.
including appliances
41.93% Industrial electrical electronic eqpt.
Heavy vehicles transportation
18.46%
Source: Annual Survey of Industries 2009-2010; Valcon analysis
The second largest engineering subsector is castings, forgings and fabrication.
This sector supplies to customers in metal and mineral processing, heavy
vehicles and transportation, industrial equipment manufacturing, construction,
automotive and other diverse industries. Customers are spread across the
country as well as several businesses have significant exports. Poor profitability
9

10. (5% of output) in this large sector is due to the low value adding nature of the
subsector.
The third largest sector, special purpose machinery, is responsible for 23% of
Punjab’s engineering sector output and has a high profitability (13% of output). It
is responsible for nearly 43% of the profits from Punjab’s engineering sector
making it the major source of profitability for Punjab’s engineering industry. This
sector includes tractors and other farm equipment; machine tools, metal forming
machinery, machinery for mining, quarrying and construction; machinery for
processing of food and beverage, textile, apparel, leather, paper, rubber and
plastics. Many of the machinery manufacturing businesses are profitable due to
local prominence of their customer industries like agriculture; textiles and
apparel manufacturing; leather, food, beverage, and rubber processing, etc.
Consumer electronics, including household appliances, is the only other notable
subsector contributing 7.2% of engineering industry profits in Punjab despite
being responsible for less than 4% of output. This is due to high profitability of
13% generated by this sector.
* The growth scale has been made linear Figure 6: Status of growth versus profitability of engineering sector in Punjab
between the lowest and median values and
median and highest values. The bubble Special purpose
position indicates the relative rank of the 10.0 machinery
sub-sector on this scale. The size of the 9.0 Consumer/business
bubble indicates the size of the sub-sector in electrical
terms of its gross output. 8.0 electronics
7.0 Medical equipment
Industrial equipment
Automotive auto
6.0 Castings forgings components
components
Profitability
fabrication
5.0
4.0
3.0
Heavy vehicles Industrial electrical
2.0 transport electronic equipment
1.0
0.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Growth
Source: Annual Survey of Industries Data 2008-2009 and 2009-2010, Valcon analysis
In summary, majority of engineering industry output from Punjab has poor
profitability and hence there is significant opportunity to improve the sector
performance.
At this stage, we take a look at the performance of engineering sector in the
country and the opportunities for growth available in various sub-sectors of the
industry.
10

11. CII – Valcon Report
Opportunities in engineering sector
Engineering sector overview in India
The engineering sector is the largest segment of Indian industry and employs
more than 40 lakh1 skilled and semi-skilled workers. It forms a significant part of
the manufacturing industry and is very diverse in nature.
India is also a major exporter of engineered products and services which is
estimated to touch ~USD 68 billion (~INR 360 thousand crores) by FY 20152. This
is primarily due to its comparative advantage of lower design, research labour
cost. The engineering sector is 100 per cent de-licensed and has accounted for
8.9% of FDI inflow2 since April 2000.
Classification of engineering sectors
The key engineering sub-sectors which are part of the manufacturing sector in
India and have been focused upon in this report are:
ƒƒ Aerospace and defence
ƒƒ Medical equipment and appliances
ƒƒ Industrial electrical and electronics
ƒƒ Special purpose machinery
yy Farm and construction machinery
yy Other process equipment
yy Metal forming and machine tools
ƒƒ Heavy vehicles and transportation
ƒƒ Industrial equipment and components
ƒƒ Castings, forgings and fabrication
yy Castings and forgings
yy Metal fabrication
ƒƒ Automotive and auto components
ƒƒ Consumer and business electrical and electronics
Some of these sub-sectors are inputs to others while some of them cater to the
consumers directly.
In terms of the gross output from these engineering industries we find that
automotive and auto parts and industrial electrical and electronics contribute
more than 50% of the output. These sectors are also among the oldest sectors
along with the castings, forgings and fabrication sectors. Some of the newer
sectors like aerospace and defence as well as medical equipment and
appliances are seeing a lot of impetus from both private and public enterprises.
11

12. Figure 7: All-India engineering industry output by sub-sector in 2009-2010
0%
8% 1%
12%
2% Aerospace defence
19% Medical equipment appliances
Consumer/business electrical
33% electronics
Automotive auto parts
Castings, forgings fabrication
Industrial equipment components
Industrial electrical electronics
Heavy transport vehicles
10%
Special purpose machinery
15%
Source: ASI 2009-2010
In order to evaluate the business attractiveness of these sectors we have
analysed them on the following business parameters:
ƒƒ Net profit profitability
ƒƒ Growth
ƒƒ eturn on gross fixed asset (only plant and equipment). This measure is a
R
ratio of net profit to gross value of plant and machinery (RoGFA).
ƒƒ Investment requirements. It has been evaluated using the measure of
average capital deployed per factory.
Evaluating the various sub-sectors for their performance on growth and profit-
ability, we find that the following stand out as more attractive than others, in
India:
ƒƒ Heavy vehicles and transportation
ƒƒ Medical equipment
ƒƒ Farm and construction machinery
ƒƒ Automotive and auto components
ƒƒ Metal fabrication
12

13. CII – Valcon Report
Figure 8: Growth and profitability of engineering sub-sectors in India * The growth scale has been made linear
between the lowest and median values and
10.0 median and highest values. The bubble
Medical equipment
Heavy transport position indicates the relative rank of the
9.0 vehicles sub-sector on this scale. The size of the
Industrial equipment bubble indicates the size of the sub-sector
8.0 components in terms of its gross output.
7.0
Aerospace defence
Consumer electrical Farm construction
6.0 electronics machinery
Profitability
5.0
Other process equipment
4.0 Metal fabrication
Industrial electrical
3.0 electronics
Castings forgings Automotive auto
2.0 components
1.0
Metal forming machine
tools
0.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Growth
In order to understand the attractiveness in terms of entering certain sub-
sectors, we have compared on return on gross fixed assets† vs. average capital
employed per factory. As can be seen from the graph (see figure {9} the most
attractive sectors where the return on gross fixed assets is high while the
average capital employed per factory is low are:
ƒƒ Farm and construction machinery
ƒƒ Heavy vehicles and transportation
ƒƒ Industrial equipment and components
ƒƒ Other process equipment
ƒƒ Medical equipment
ƒƒ Metal fabrication
†
It only includes plant and equipment
13

14. * The growth scale has been made linear Figure 9: RoGFA vs. avg. capital deployed per factory
between the lowest and median values and
median and highest values. The bubble
10.0
position indicates the relative rank of the
Heavy transport
sub-sector on this scale. The size of the 9.0 vehicles
bubble indicates the size of the sub-sector
in terms of its gross output. 8.0 Automotive auto
Avg. capital deployed per factory components
Industrial electrical
7.0 electronics
Industrial equipment
components
6.0 Farm construction
machinery
5.0
Consumer electrical
4.0 electronics Medical equipment
Other process equipment
3.0 Castings forgings
2.0 Metal fabrication
1.0 Metal forming machine
tools Aerospace defence
0.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
RoGFA
In addition to the above parameters, it is also important to consider the size of
the sectors since it indicates more opportunity. Automotive and auto
components which is the largest sub-sector under engineering with a strong
growth trajectory is an important sector to consider.
Considering all the above mentioned parameters simultaneously and giving
higher weightage to profitability and RoGFA, we identified the following
sub-sectors for detailed study:
Avg. capital
employed per
Sub-sector Growth rate Profitability RoGFA
factory
Farm construction High Medium High Medium
machinery
Heavy vehicles High Medium Medium-Low Medium-High
transportation
Medical equipment High High Medium-High Medium-Low
Industrial equipment
components Medium Medium-high Medium-High Medium
Metal fabrication Medium Medium Medium-High Low
Note: Lower avg. capital deployed per factory lowers the entry barriers for firms
Some of these sub-sectors such as farm and construction machinery and
automotive and auto components have a strong resonance to Punjab’s
engineering sector
The following section delves deeper into each of these sub-sectors and their
typical characteristics.
14

15. CII – Valcon Report
Engineering sub-sectors
Medical equipment
India’s medical equipment market – valued at $4.9 billion (INR 25.8 thousand An estimated three-quarters of
India’s demand for medical
crores) – is Asia’s fourth-largest (behind Japan, China, and South Korea) and is
devices is currently met by
projected to reach $8 billion (INR 42200 crores) by 2015, as health insurance
imports, nearly 30% of which
becomes more widely available and the country’s middle-class consumers
are supplied by the United
continue to demand better healthcare services.
States.
India’s rapidly growing healthcare market is providing significant trade
opportunities for medical device firms. An estimated three-quarters of India’s
demand for medical devices is currently met by imports, nearly 30% of which
are supplied by the United States
By 2050, India is expected to overtake China as the world’s most populated
country, with a projected population of 170 crores. By 2025, India’s elderly
population (aged 60 and above) is expected to reach nearly 200 million.
Figure 10: Medical devices market
6
5
4
US $ billion
3
2
1
0
2006 2009 2012
Source: FICCI report
Key segments
Medical instruments and appliances, orthopaedic and prosthetic appliances are
the key segments in this category with 25.10% and 20% share. The
consumables such as bandages, medical supplies and syringes contribute close
to 20% to this category.
15

16. Figure 11: Key segments of medical equipment
15.20% 25.10% Medical instruments appliances
X Ray apparatus
Bandages other medical supplies
10.20% Orthopeadic, prosthetic appliances
Syringes, needles
Electromedical
Others
9.5%
12%
7.6%
20%
Source: www.aimedindia.com
The Indian medical technology industry is highly competitive and fragmented,
with domestic firms primarily manufacturing low technology products such as
disposables/medical supplies, and MNCs primarily importing high end medical
equipment. MNCs seeking to enter the industry typically form joint ventures
with local manufacturers, establish subsidiaries or employ local agents to
distribute their products.
Key growth drivers
ƒƒ Faster upgradation of existing technology and global new product innovation
ƒƒ Availability of advanced and sophisticated medical technology
ƒƒ Medical tourism is being promoted by the government and stimulated by the
corporate boom in medical care driving private care providers to upgrade their
medical technology infrastructure
ƒƒ Increased penetration of health insurance leading to increased coverage of
high cost treatment
ƒƒ Rising disposable income/purchasing power
Key challenges
ƒƒ Penetration is very low in rural/towns/smaller towns due to affordability.
Rural healthcare providers would want a cheaper and cost effective solution
and don’t opt for high end products
ƒƒ Unclear government regulation coupled with ambiguous quality standards is
also a key challenge faced by this sector
Way forward
ƒƒ Financial engineering along with product sales can dramatically enlarge the
market
16

17. CII – Valcon Report
ƒƒ se of technology to reduce cost, increase penetration such as telemedicine,
U
remote monitoring etc. Innovation is the key
ƒƒ Sound regulatory framework is a key enabler for the growth of the medical Companies need to innovate
technology and invest in RD to come out
with cost effective solutions
and think of economies of
Farm, construction and mining machinery scale so that they can reach
more customers with the right
This sub-sector caters to two significant sectors of the Indian economy;
pricing.
Agriculture and infrastructure which together contribute more than 25% to
India’s GDP. Currently the farm and construction machinery sub-sector accounts
for only about 4% of the engineering sector output but has seen a growth rate
of over 18% over the period FY2009 to FY2010.
The farm machinery segment consists of diverse set of products across the
agricultural value chain:
Fig. 12: Agricultural value chain
Weeding
Tilling seeding Post harvest
Sowing plant Harvesting
preparation processing
protection
Tractors Seeders Harrow Harvester Seed extr.
Levelers Planters Tiller Thresher Dehusker
Ploughs Transplanter Sprayer Reaper Mill
Duster Dryer
Amongst all the products, tractors are the largest segment in India and is also
one of the main categories of products exported. Several Indian companies like
Tractors Farm Equipment Ltd. (TAFE), Mahindra Mahindra, Escorts Agri
Machinery Group, etc. have built successful business with tractors as their main
product category. India is the world’s largest producer of tractors and accounts
for a third of the world’s production. India is a net exporters of tractors, which
has grown at a CAGR of 17% over the last 5 years. The domestic market has
grown at a CAGR of ~15% over the last 5 years with North India being the
largest market.
17

18. CII – Valcon report on enginnering industry in Punjab
Figure 13: Region wise tractor sale FY 2008 and FY 2009
Increased mechanisation and 9% 13%
lower labour availability is
driving the domestic demand
18% 21%
for farm equipment. In addition, 38% 36%
cost pressures in the
international markets are
forcing global players to 8%
source components and
assemblies from India in 10%
growing volumes. Central 26% Central 19%
West West
East East
South South
North North
Source: CMIE Prowess
The tractor industry is very organised and also fairly consolidated as can be seen
from the market share trends below:
Sub sector FY 2008 FY 2011 FY 2012
Mahindra Mahindra Ltd. (MM Ltd.) 34% 39.6% 39.2%
Tractors Farm Equipment Ltd. (TFEL) 21% 21% 24.0%
Escorts Ltd. 13% 12.1% 10.3%
John Deere Equipment Pvt. Ltd. 8% 9.8% 9.2%
International Tractors Ltd. 8% 8.5% 8.3%
Sources: CMIE Prowess, IAS
Key drivers
ƒƒ Increasing need for mechaniation. The difficulty in getting manual labour due
to urbanisation and the need to improve productivity are driving the use of
machinery to enable sustainable farming
ƒƒ Emergence of corporate sourcing from farmers. This has led to an increase in
margins available to the farmer enabling the drive for greater productivity
ƒƒ Better financing and credit schemes in rural areas. Government subsidies and
also organised money lending by co-operative banks has given avenues to
the farmer to procure farm machinery
18

19. CII – Valcon Report
The government has estimated that investment worth INR 40 lakh crores will be
made over the 12th five year plan period in Infrastructure development in the Infrastructure growth has
country. The key areas of infrastructure are rail, road, power, ports and airports slowed down but it is an
which contribute about 66% to the construction sector in India while residential imperative if growth in India
and commercial account for 27% and 7% respectively. Private participation in needs to be sustained.
the infrastructure sector is set to rise to 50% of the total infrastructure Increasing number of
investment. This growth is one of the primary drivers for the construction international firms are setting
equipment sub-sector. up manufacturing and sourcing
operations in India to cater to
Construction and mining equipment consists of machinery such as hydraulic domestic as well as
excavators, backhoe loaders, bull dozers, dump trucks, pavers, wet mix plants, international demand.
cranes, fork lifts, dozers, etc. with an estimated market size of INR 14,740
crores.
A classification of this equipment is as shown below:
Construction mining equipment
Material handling
Earth moving equipments Other machineries
equipments
Backhoe loaders Conveyors Concrete mixers
Wheeled loaders Forklifts Road rollers
Excavators Automated storage Pavers
Trenchers Automated guided vehicle Spraying plastering M/C
Bulldozers Cranes hoists Hot mix plants
Dumpers Robots, etc. Crushers
Graders Pumps (heavy duty)
Compactors Slurry seal machines
Scrappers, etc. Tunneling drilling
Machines
Tippers, etc.
Source: Industry sources, DB Research
Backhoe loader is the largest segment in the sector, in terms of volume followed
by hydraulic excavators and mobile cranes.
The Indian construction and mining equipment industry is estimated to have
presence of about 200 players, though can be considered as organised as
players in the organised sector are estimated to account for about 80-85% of
the revenue and the top four player s together account for ~85% of total
market share. JCB India Ltd. is the market leader in the Indian construction and
mining equipment market, accounting for ~30% of total market share, followed
by BEML Ltd (~18%).
19

20. CII – Valcon report on enginnering industry in Punjab
Figure 14: Major players
16.3% JCB India Ltd.
BEML Ltd.
30.6% Tecpro Systems Ltd.
Mcnally Bharat Engg. Co. Ltd.
9.3%
LT Komatsu Ltd.
Others
12.1%
18.3%
13.6%
Source: Industry Sources, CMIE Prowess, DB Research
Raw material expense is the largest operating expense component in the sector,
accounting for ~56.7% of total sales in FY 2012. Iron and steel are the two main
raw materials used in the segment.
Evaluating the farm and construction equipment sector on some of the
operational parameters gives a better perspective of the governing factors for
success in this sector. Here we have compared this against auto components to
give greater clarity on their relative requirements. As we can see here the farm,
construction and mining machinery industry has relatively similar product
complexity but has a lower requirement for precision. Also given that on an
average this sector has a larger product size it implies a higher value product.
Figure 15: Product complexity and product size
High
High
Auto components
Product valueadd
Farm construction
Precision levels
machinery
Farm construction
machinery
Auto components
Low
Low
Low High Light Heavy
Product complexity Product size
20

21. CII – Valcon Report
Metal fabrication
This is a highly fragmented and labour intensive sector with medium and small
scale industries heavily dependent on job work. Fabrication applies to the
building of machines, structures and other equipment, by cutting, shaping and
assembling components made from raw materials by using various mechanical
processes such as welding, soldering, forging, brazing, forming, pressing,
bending and stress removal. Welding is a major process input in most
fabrication jobs.
Since the demand for fabrication sector comes from the engineering sector, Steel availability coupled with
especially capital goods, the growth of fabrication industry largely depends on labour availability enables
the overall industrial scenario. The fabrication industry caters to many sectors Indian firms to deliver
such as transportation, construction and structures, industrial and heavy fabricated products which are
equipment, packaging, consumer products, etc. The major user industry for the competitive globally. Domestic
fabrication sector is the general structural fabrication followed by the railway demand for structural steel
and shipping, machine building and construction. (on-site and off-site) is driven
primarily by the core
Raw material is the primary cost driver of this industry and is easily available in infrastructure segments and
India, only special steel needs to be imported. However, with prices of steel construction segments
increasing on global and domestic level, slowing demand and manufacturers in (residential and commercial).
the engineering sector planning a reduction in production capacity, the growth
of this industry is likely to undergo a moderation in the near term.
Figure 16: Cost structure [%] (2011)
0%
3.1%
Increase in stock
2% Raw materials
0% Power generation and distribution
Other manufacturing expenses
Employee cost
10.4%
Selling and administration expenses
Miscellaneous expenses
Depreciation
7.1%
61.9%
Other operational expenses
9.6%
5.8%
Source: Ecotrends
21

22. Key drivers
ƒƒ roject based – core industry sector plays a major role and effects upstream
P
and downstream fabricators
ƒƒ edium and small scale industries heavily dependent on job work
M
ƒƒ More power dependant compared to a machining industry
ƒƒ rowth also dependent on growth in the engineering sector, especially
G
capital goods industry
ƒƒ Construction industry will drive the demand for small units and also on site
fabrication for structural elements
Future growth outlook
ƒƒ General structural fabrication will continue to grow (example: cement, power,
two-wheeler frames, etc.)
ƒƒ ousing sector growth will affect performance of small and medium
H
fabricators
ƒƒ lectrical and power projects – major impetus for future success
E
Evaluating the metal fabrication sector on some of the operational parameters,
shows us that the precision requirements are far lower than auto components
and also has lower product complexity. On the other hand it is more labour
intensive and requires higher skill level since there are more manual
intervention as compared to auto components. This gives a fair indication of the
cost drivers and importance of skilled labour in this sector.
Figure 17: Product complexity and operator skills
High
High
Metal fabrication
Auto components
Labour intensiveness
Precision levels
Auto components
Metal fabrication
Low
Low
Low High Light Heavy
Product complexity Operator skills
22

23. CII – Valcon Report
Industrial equipment and components
This sector consists of varied set of equipment with application across all major
industries including power, automotive, construction, capital goods, etc. The
various categories which form this sub-sector are as shown below with engines
and turbines (33%) forming the largest category. Refrigeration, air-conditioning
equipment (19%), pumps and compressors (14%) and bearings and gears (13%)
constitutes the other key categories.
Figure 18: Revenue share by segment
Engines turbines
19% Hydraulics pneumatics
33%
Pumps, compressions valves
0%
Bearings gears
Heating equipment
10%
Lifting handling equipment
Power driven hand tools
3% Refrigeration, air-conditioning, fire
extinguishers weighing machinery
8%
13%
14%
In terms of their profit contribution to the sector the main segments are engines
and turbines, pumps, compressor and valves and refrigeration and air
conditioning.
Figure 19: Profit share by segment
11%
0% Engines turbines
50% Fluid power equipment
7%
Pumps, compressions valves
2% Bearings gears
Heating equipment
10%
Lifting handling equipment
Power driven hand tools
Refrigeration, air-conditioning, fire
extinguishers weighing machinery
14%
6%
23

24. Engines and turbines
The main sector that this segment caters to is the power generation sector and
generally grouped under the boiler-turbine-generator (BTG) segment.
Figure 20: Revenue share by segment
10%
Boilers
Turbines
Generators
27%
63%
Source: IBEF Report on Elecrical Machinery
It is expected that about 40% increase in thermal power capacity will be seen in
the 12th five-year plan period. Most of the equipment for the projects under
execution is being supplied by Chinese OEM’s with BHEL and LT MHI being the
other significant player.
Figure 21: Share of OEMs for super-critical projects under execution
12%
China-based OEMs
BHEL
LT-MHI
15%
Others
57%
16%
Source: ICRA Research
With many bilateral nuclear agreements in place, India is expected to become
a major hub for manufacturing nuclear reactors and associated components.
The Indian Government proposes to add 3,380 MW of nuclear power capacity
by 2012.There is a huge opportunity for players to re-orient and focus their
efforts to develop technology for higher capacity thermal units and nuclear
reactors.
24

25. CII – Valcon Report
The key challenge facing the sector is the delay in project execution which
impacts the order flow and cash flow. Also transport of this equipment faces
major issues due to the absence of good quality infrastructure.
Raw material is the primary cost driver followed by employee cost.
Figure 22: Cost structure [%] (2011)
0.1%
2.2%
2.9%
5.5% Increase in stock
Raw materials
12.7%
0% Power generation and distribution
Other manufacturing expenses
Employee cost
5.4% Selling and administration expenses
Miscellaneous expenses
1.1%
Depreciation
70.2%
Other operational expenses
Source: Ecotrends
Key drivers
ƒƒ Increasing demand for energy and large investments in the energy sector The BTG as well as pumps and
ƒƒ Civilian nuclear deals between India and other nations will encourage compressor segments are
growth in the nuclear power generation sector driven by the growth in power
and oil and gas sectors.
Pumps, compressors and valves Technology capabilities play
an important role in the high
This category of products is used across multiple sectors like oil and gas and
value/performance sectors
agriculture and power generation. Pumps and valves comprise of more than
Table 10 Pumps valves compressors and there is a need for
two-thirds of this INR 12,000-14,000 crore sector while compressors is the
domestic companies to invest
other category. in RD to build more profitable
Some of the major players in the Indian market are: businesses.
Pumps Valves Compressors
Kirloskar Brothers Ltd. Flowserve Corporation BHEL
CRI Pumps Tyco Flow Siemens
Crompton Greaves LT Audco Ingersoll Rand
KSB Fisher Sanmar Atlas Copco
Bharat Bijlee BHEL Dresser Rand
25

26. Compressor design complexity implies a fewer number of domestic
manufacturers while pumps and valves market has a significant unorganised
segment. In India the Rotary compressors dominate the market with 85%
share.
Figure 23: Pumps market share - organised vs unorganised
Organised retail and
processed food sectors will Unorganised
drive a wave of growth in the Organised
cold chain infrastructure
across the country. A large
number of domestic and
56% 44%
international players are
gearing up for it.
Source: Netscribes – Pumps Market 2011
Key drivers
ƒƒ Growth in oil and gas sector with large number of projects
ƒƒ Irrigation projects with the government’s increased focus on agriculture
Refrigeration and air conditioning equipment
This sector is seeing a boost in its growth with increased need for cold chains
to be established. The process of storing, transporting and displaying food at
appropriate temperatures will gain more significance. Refrigeration segment
is expected to grow at about 10-15% over the next 3 years while the air
conditioning segment is poised for a 15-20% growth over the same period.
Figure 24: Market share by segment
8%
Air conditioning systems
Commercial refrigeration
14%
ACR servicing
78%
Source: AIACRA
26

27. CII – Valcon Report
There are large number of Indian and international firms which have a strong
presence in this sector such as Blue Star, Carrier, Haier, Voltas. The key
component of refrigeration and air conditioning systems are compressor
which has been described in the previous section.
Key drivers
ƒƒ Growth in organised retail
ƒƒ Growth in processed food sector
ƒƒ Increased need for air conditioned commercial establishments
Auto components
Growth in automobile sector has been one of the key drivers of the economic
growth of the country. However, Indian auto components industry has been
witnessing a moderation in its revenue growth to 16% in FY 2012 as compared
to the average growth of above 30% in previous two fiscal on the back of
slowing automobile sales.
Figure 25: Comprehensive product range
7% 9%
Electrical parts
10% Equipment
Suspension braking parts
Body chassis
31%
Drive transmission steering parts
12% Engine parts
Others
12%
19%
Source: www.acmainfo.com
As compared to the auto component market overseas, India focuses primarily on
the ancillary and equipment segments rather than engine and suspension parts,
due to its developing RD capabilities. Contribution of suspension and braking
parts and Equipment is going to improve in the years to come due to use of 4
wheel drive and increase in replacement market.
India is one of the largest auto components market with a production turnover of
INR 226 thousand crores in FY 2012. It has grown at a CAGR of ~18.7% over FY
2008-12. Growth in domestic auto industry and demand from export market led
to the growth of auto component industry.
27

28. Figure 26: Growth of Indian auto components industry
Indian auto component
industry comprises of round 7000
600 companies in the E
% 5876
6000 13
organised sector which wt
h
gro
account 85% of the production ted
5000 tima
whereas more than 6,000 Es
INR (billion)
companies involved in the 4000
3447.6
unorganised market.
3000
2262
2074.8
2000 1565.2
1378 1196
1000
0
2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2015 - 16(E) 2020 - 21(E)
Year
Source: www.acmainfo.com
As per industry estimates, out of the total turnover of the Indian auto
components industry, around 60% is derived from sales to domestic OEMs,
around 25% comes from sales to the domestic replacement market and around
15% is derived from exports
Competitive scenario
Indian auto components industry apart from being categorised into OEMs and
replacements market is organised but highly fragmented in nature.
Table 11 Competitive scenario
Indian auto component industry comprises of round 600 companies in the
organised sector which account 85% of the production whereas more than
6,000 companies involved in the unorganised market.
Company Number of companies
Turnover range (INR Bn)
classification in organised sector
Medium 10 14
Small 2.50 - 10 85
Mini 0.50 - 2.50 200
Micro 0.50 305
28

29. CII – Valcon Report
Altogether top five players account for ~9.24% of the market while top ten
companies corner ~11.93% of the market. Low share of leading companies
indicate the fragmented nature of the industry.
India has been a net importer of auto components during FY 2008-12 and while
imports continue to grow at 25%. However, exports continue to be the beacon
of hope despite the slow-down in the global economy.
Export-import dynamics
Exports to European region accounted for highest share in auto component India remained a net importer
exports from India of 39% in FY 2012, followed by America region (30%), Asia of auto components during FY
(19%). However, the exports to Africa region recorded highest y-o-y growth of 2008-12. Imports continued to
about 55% followed by over 39% growth in exports to European region during grow at 25%, exceeding USD
the similar period. 10.5 billion compared to USD
8.5 billion in the previous year
Figure 27: Growth of exports vs imports as compared to growth of
exports at 18%.
28 Exports
334
FY 2012 14 514.4 Imports
237.1
FY 2011 387.6
160
FY 2010
306.8
184
FY 2009
312.8
159.6
FY 2008 260.4
0 100 200 300 400 500 600
Source: crisil.com www.acmainfo.com
50
Key drivers
ƒƒ The performance of auto component industry is totally dependent on the
performance of automobile sector. The future outlook is still better with auto
component mirroring the auto industry growth at a rate of 13-15%
ƒƒ Increasing focus on localisation of vendor base
ƒƒ Sourcing of auto components by international automobile companies to cut
costs
ƒƒ Increasing focus towards quality certification which has now led to
increased purchase of parts from the organised market
29

30. Figure 28: Growth of auto components relative to growth of auto industry
40%
% growth
20%
0
0
1
2
..
..
-1
-1
-1
-.
-.
15
20
09
10
11
20
20
20
20
20
Auto component Auto industry
Source: CMIE IAS
Key challegens
Though in the long term, auto component’s growth prospects are strong, it is
facing challenges and bottlenecks to growth:
ƒƒ Financial viability in face of ever increasing cost pressures
ƒƒ Tier 2/3 companies also face challenges of low return on investment which
prevents scaling up of operations
ƒƒ Economic condition. High interest rates coupled with inflation and weakening
of the rupee
ƒƒ Work force management
ƒƒ Government’s move to push for more multilateral and bilateral trade
Government initiatives to promote growth and innovation
ƒƒ The government has proposed to formulate a sequel of AMP II (2018-27) to
put in place a framework for the long term growth trajectory for auto and
auto ancillary sector
ƒƒ Creation of Technology Up-gradation Development Scheme (TUDS) for auto
components and setting up of Auto Component Technology Development
Fund (ATDF) which will help auto component companies in accessing loans at
reduced rates of interest for research and development activities,
upgradation of process and technology acquisition
ƒƒ Auto Component Manufacturers Association (ACMA) has identified the long
term investment requirement by auto component industry during 2012-16 of
about ~INR 15,000 crores of which ~INR 7,500 crores are proposed to be
financed through soft loans with interest subvention
30

31. CII – Valcon Report
ƒƒ The government has allowed 100% foreign equity investment in the sector,
through the automatic route, without any minimum investment criteria The auto components industry
in India is around two-thirds
Future growth outlook the size of the OEM segment.
There is no doubt the medium to long-term growth story of India remains intact, This proportion is around one
however auto component industry will have to get used to such transient to two times in mature markets
ups-and-downs arising from the difficult economic situation. Significant of Europe, America and Japan.
opportunities exist to enhance share in the global automotive market. Industries
need to invest in design and development to move up the value chain.
Currently, the auto components industry in India is around two-thirds the size of
the OEM segment. This proportion is around one to two times in mature markets
of Europe, America and Japan. This indicates:
ƒƒ Higher proportion of imports of auto components in India by OEMs and
ƒƒ Lower replacement market sales
Other sub-sectors
The following sub-sectors also appear to have a larger scope for business
growth over the medium term:
Electronics (engine-side and body-side) – The localisation proportion of
electronic components in Indian cars remains low as of now. Given the growing
need to offer driver information systems, engine management systems and
emission control systems in cars to meet the advancing safety and emission
regulations, the use of electronics in Indian cars is likely to see a proliferation in
the times to come. This should translate into strong growth for auto ancillaries
having capabilities in this segment.
Plastics – Although this segment is already quite competition intensive,
considering OEMs’ focus on adopting light-weighting technologies and already
several instances where material of components has been changed by OEMs
from sheet metal to plastic; it augurs well for auto component manufacturers
having strong capability in the plastics space. Sheet moulded composites, bulk
moulded composites and long fibre thermoplastics are some of the new
materials being used to replace metal and conventional plastics.
Aluminium die-casting – In the boom period of 2009-10 and 2010-11, the auto
industry had experienced significant capacity constraints for aluminium die-cast
components. The capacity shortage was more severe at tier-2 suppliers’ end and
this had prompted few tier-1 players to backward integrate not just for captive
consumption but also for selling to other customers. Also, for select engine
components, OEMs are likely to demand tighter product tolerances to meet the
stringent emission control norms which in turn is likely to increase per unit
realisation for auto ancillaries manufacturing such components (although at the
cost of higher capital investments).
31

32. Aerospace and defence – Sunrise sector with
strong long term potential
Overview
This sector is currently in its nascent stages in India but presents a large
opportunity. Until now, most projects are executed by PSU or government
research agencies which have the RD and technological expertise. But
with more private players acquiring technological capability by way of JV’s,
acquisitions or talent inflow have begun to play a more significant role not
just domestically but also on the international stage.
Key drivers
ƒƒ 100% private sector participation with defence having a restriction of
26% FDI
ƒƒ Offset policy from large defence spend
ƒƒ Strong maintenance, repair and overhaul (MRO) capabilities
ƒƒ Continued growth of civil aviation
ƒƒ Investments in the Indian space programme – INR 40,000 crores during
the period 2007-2012
Key challenges
ƒƒ Moving up the value chain from being tier 2-3 suppliers to tier 1 suppliers
ƒƒ Building design and integration capabilities
ƒƒ Availability of highly skilled workforce
ƒƒ High import duties on imported components
ƒƒ Access to funding for high initial capital investment
Overall sector outlook
Demand in the engineering sector is expected to remain healthy primarily on
account of the government increased thrust on infrastructure development in
turn having positive impact on various sub-sectors. Favourable government
policies and regulations would enable the sector to scale up its growth
potential.
Increased spend in defence, improving medical infrastructure, indigenisation of
auto components to tap export potential, farm and construction equipment are
going to be critical drivers for growth of this engineering industry.
The next section analyses Punjab’s strength in leveraging the growth potential.
32

33. CII – Valcon Report
Potential for Punjab’s engineering
industry
Strengths and weaknesses
Though Punjab has been an agriculture dominated economy since
Independence, the state occupied an important position in the engineering
sector of the country. The industrial towns like Ludhiana, Amritsar, Jalandhar,
Mohali, etc. host several small, medium and large industrial units. Dominated
by small and medium enterprises, Punjab excels in production of leather goods,
textiles, machine and hand tools and paper packaging.
Local availability of raw material, skills and market demand have contributed to
significant growth of these industries. All of this was adequately supported by
the enterprising spirit of Punjab’s businessmen who instilled flexibility in running
their operations to meet diverse customisation requests and customer
expectations.
The success of the engineering industry is primarily due two reasons: the spurt
of agricultural growth that aided the manufacturing to move out of infancy
through sustained local demand, and the ability of the businessmen to think
ahead of time and ahead of competition.
Examples of such forward thinking include use of automation in textile
manufacturing, development of machine tools industry, leadership in high
volume bicycle market and so on.
However, it would not be prudent to say that all local companies have adopted
innovative thinking and best practices. Companies have usually focussed on one
or two strengths that would set them apart from the competition. This is also
reflected by inputs received during our discussions across industries in Punjab
(see figure {29}).
33