Hesitant recovery in capital goods

By Ramnath Subbu

MUMBAI, MAY 13. The production and import of most capital goods continue to be slack because of low level of capital formation in the country, but in the engineering goods category, there is some room for cheer.

The capital goods sector can be divided into non-electrical and electrical. The non-electrical machinery segment is cyclical in nature and its prospects hinge directly on industrial investment. On the other hand, the fortunes of electrical machinery are tied almost wholly to the power sector development.

In the non-electrical segment, machine tools, textile machinery, compressors and drilling equipment, diesel engines and general industrial machinery are the main categories.

The profit margins in the industry are by and large driven by access to technology and global markets, the ability to identify niche areas, efficient inventory and debt management, good after- sales service, ability to offer solutions rather than products, and product innovation and range.

According to the Centre for Monitoring the Indian Economy (CMIE) Monthly Review, in the period April 1999-February 2000, air and gas compressors have bounced back after facing rough times, with a 159 per cent plus increase in production to 67,352 numbers as compared to the same period in the previous year. This is a good for companies like Ingersoll Rand, Atlas Copco and Chicago Pneumatic.

Although compressors have a wide user range, most orders are from the petrochemicals, natural gas and oil exploration, fertilizer, infrastructure and construction industries. The demand for compressors is dependent almost entirely on capacity expansion and new projects by user industries.

Diesel engines also have done well with an increase in output last year by 32 per cent to 2,672,018 numbers. Kirloskar Oil Engines, Cummins India and Hindustan Power Plus are some of the players in the segment. Demand for engines depends on the offtake of power generating sets which is linked to overall industrial production.

The Technology Upgradation Fund for the textiles sector seems to be having a beneficial effect with production of textile machinery also on the rise. There is also a significant improvement in the electrical machinery segment. Telecom cables have been showing a major production growth after the Department of Telecommunications and private phone operators started placing orders. Switchgears production increased by 235 per cent and that of insulated cables/wires by 81 per cent. Transformer turbines sales are also up. Companies such as Bharat Heavy Electricals, Siemens, L&T, ABB and Alstom will benefit from the upturn.

In industrial machinery, Alfa Laval and Thermax have restructured their businesses and identified their businesses and niche product areas to improve bottomlines. Thermax's energy, chemicals and co-generation divisions are expected to do well.

In machine tools, the cutting tools segment holds more promise than general purpose machines. Although the products cater to all industries, a large part of it is directed at the automobile industry and the growth witnessed in the auto industry has already had a salutary effect on machine tool manufacturers.

However, while the production figures are impressive, their impact on the financial performance of various companies concerned will be felt only after price realisations are found satisfactory. It must also be kept in mind that the production figures look impressive mainly because of the poor performance in the previous period.

However, there has been some consolidation activity in the capital goods sector in the recent past with major players taking steps to get out of the difficult times. ABB's power generation business was globally transferred to the new 50:50 joint venture with Alstom in 1999. In India, the power generation business has been demerged and transferred to ABB Alstom Power India Ltd. with effect from April 1, 1999.

The power generation business of the company has been transferred to Powerco. The `new' ABB is now focussing on expanding its knowledge and service based business to provide integrated customer solutions. The company aims to be a hi-tech service provider.

Meanwhile, there are reports of United Bank of Switzerland (UBS) buying out Alfa Laval, a major dairy equipment maker in Europe, by the end of the month. Alfa Laval India has been planning to set up a facility for big separators. The proposed takeover in Europe will benefit the Indian operations as there could be relocation of some of the European plants in India where manufacturing costs are about 25 per cent lower.

Atlas Copco (India) Ltd. and Chicago Pneumatic India Ltd. (CPIL), active in the compressors segment, have announced a merger. In line with Atlas Copco Group's practice in other major markets, the rationale behind the proposed merger is to create a simpler legal structure for the companies in India and to strengthen their competitive position. Substantial benefits are expected to flow from rationalisation in the areas of finance, administration and logistics as well as from better co-ordination of product development and manufacturing resources.

Atlas Copco assembles screw compressors and manufactures construction tools, rock drills and mechanised drill rigs. Chicago Pneumatic manufactures /assembles industrial and construction tools, reciprocating compressors and screw compressors.

Ingersoll Rand (India) has empowered the board to negotiate divestment of the Gas compressor business. The parent company has decided to sell their interest in Dresser-Rand, a minority-owned joint venture, through which the gas compressor activity is being carried on throughout the world. Once this is done, Ingersoll Rand will find it difficult to keep its gas compressor product line at Ahmedabad alive due to lack of support.

Larsen & Toubro (L&T) has announced major restructuring plans following the recommendations of the Boston Consulting Group (BCG). The plan consists of four key elements - shape and structure of the overall portfolio, value creation plans for each business, corporate and organisation structure and internal value based management processes.

The blueprint foresees that in the long term, the company portfolio will consist of an engineering core and two thrust areas: cement and information technology & communication. While the company already has a 100 per cent subsidiary in information technology (LTITL), it is also assessing entry into other IT and communication services in its value creation pursuit.

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