State of the Economy 2018

Sitting tight

While powder coaters and plastic makers in Peenya await favourable policy changes, CNC manufacturers are riding a steady growth wave

India’s Silicon Valley or Electronic City — at least one of these titles is often used to describe Bengaluru. However, what several people aren’t familiar with is the city’s proximity to one of Asia’s largest industrial clusters in terms of area — Peenya — a manufacturing hub that houses 8,500 units. Spread across 40 sq km, industries here clock an annual turnover of Rs.20,000 crore. With engineering being one of the biggest sectors in this cluster, you are bound to come across computer numerical control (CNC) manufacturers and ancillary units such as surface coating companies and power tool makers at every turn you take here. 

Touted to be the largest cluster in Peenya (estimated turnover: Rs.1,200 crore), with 3,000 units employing 24,000 people, CNC manufacturers seem to have witnessed a fairly stable fiscal. These are units where computer-controlled machines are used to produce components for a diverse set of industries including healthcare, automobiles, aerospace and locomotive.

One such company is Unnathi CNC Technologies, set up by Sandeep Parvatikar with three friends in 2007. What started out as an auto component manufacturer with one CNC machine, today boasts of 25 CNC machines that bring in around Rs.12 crore annually from clients such as HAL, Merck Life Science, Otto Bilz India and Flowserve. “After burning our fingers during the 2008 recession where we catered only to the auto industry, we changed our policy. Today, we only produce small batch quantities and don’t allocate more than 30% of resources to a single client,” Parvatikar says. 

While the current fiscal has been a stable one, there were a few hiccups due to GST. “Our working capital is getting blocked. Also, there is still confusion on the prevailing rates. One customer says 18% and another says 28%, I’ve ended up supplying the same product at different rates to different customers,” says, P Sudarshana, of Mighty Machines that clocks an annual turnover of Rs.10 crore by catering to the likes of Wipro and Siemens.

GST teething troubles apart, Parvatikar adds that there are a couple of issues plaguing the sector, the most important one being lack of skilled labour. Despite the CNC industry being around for 30 years, there are still no ITI colleges granting diplomas in the same. “As a result, we get engineering graduates or those with a diploma, who are not industry-ready. If they join, they quit for a bigger pay packet at an MNC in a year. Thus, we hire students who haven’t completed their SSC or graduation and train them instead,” he says. 

No matter what the scale of the CNC unit, the minimum equipment cost is Rs.20 lakh with advanced machinery going all the way up to Rs.2 crore-Rs.3 crore. “CNC manufacturing is a capital-intensive business. The investment to turnover ratio is low in this industry. Yet, banks tell us we aren’t utilising our funds efficiently,” explains MJ Prasad, managing partner, Accutech Enterprises, who says the need of the hour is an industry-specific finance scheme.Accutech clocks a revenue of Rs.25 crore and supplies components for diesel and rail engines for Wipro, L&T Komatsu, Dassault Rafale and HAL. In addition to this, unscheduled power cuts have made a comeback this fiscal. Metal prices have also risen in January and if their customers don’t agree to a price hike, the FY19 net margin of CNC units will be eroded by 2-3%.

Growth erosion
While rising metal prices might be a cause of concern for the CNC cluster, metal treatment, a process required for almost every engineering company here, is turning out to be a cumbersome affair for units who are into powder coating, electroplating and painting. But, that wasn’t the case in 2013 when Ramesh Naidu and Sanjay Bhat merged their individual powder coating units to start Nandini Natura Coatings. The unit that brought in Rs.1.3 crore in FY14, reached Rs.3 crore by FY17 and was aiming for a 30% growth this fiscal but Bhat explains why that might remain an unachieved target, “We provide a service for our clients. If their orders are good, we get brisk business. But this year, there has been a slowdown in orders.”

Nandini Natura, which counts the likes of ABB India, Godrej Busbar Systems and Rittal India among its 80 clients, has seen its production reduce from 15,000 sq ft per month to 11,000 sq ft this fiscal. The unit is also fending off increasing pressure from the Pollution Control Board, which in 2012 clubbed it with electroplating units as “hazardous” chemical emission units. Since then, the local bodies have not issued any new licence for powder coating units but Peenya continues to house 250 legacy factories that employ around 3,700 people.

Bhat and several other powder coaters, currently incur an additional cost of transporting the used water in tankers to a treatment facility that is 40 km away from Peenya.“It is approved by the Pollution Control Board but being a private player, the price charged is exorbitant. We have urged the Board to build a government-run common effluent treatment plant in Peenya,” says Bhat. In order to avoid the hassle that majority of his peers are undergoing, 70-year-old AJS Rai, proprietor, Teal Power Coatings, found a way out. Set up in 2004, he too followed the conventional method until 2011. “I invested Rs.40 lakh and purchased two blasting machines that eliminated the use of water entirely,” explains Rai whose unit caters to the likes of ABB India and Auma, a German manufacturer of actuators and gearboxes.

If pollution hassles weren’t enough, in 2017 these units, which were earlier exempted from tax, being classified as ‘job work’, got meshed in the 18% GST bracket. “GST has put an unnecessary financial burden on us. 18% is not a small amount for us, we work for a 5-10% margin and get paid over 90 to 120 days. Banks are also charging a steep 11.5% interest on working capital,” explains Vijaykumar Makal, proprietor, Essem Powder Coatings, and secretary of the city’s Powder Coaters Association. 

 Business, too, has slowed down this fiscal given the stagnant private sector capex. “Earlier Auma alone would give me orders of Rs.4 lakh-Rs.5 lakh per month; that has now reduced to Rs.3 lakh. My margin has also declined from 25% to 10-15% as paint companies have increased their prices by 8%-10%. How does one sustain a business in such a scenario?” he wonders out aloud. Bhat points out that the lull in the real estate market has reduced growth this year to 10% and hence he has shelved plans to purchase an auto conveyor belt. Makal on the other hand, shut down a plant where an auto conveyor belt was installed, after absorbing losses for three years.

Another Peenya-based unit that has felt the pressure of a slump in real estate is Hitachi Koki India, which has an 18% market share of the branded power tools market. The company’s executive director Dattatraya Joshi defines the current fiscal as challenging but not one of negative growth. “Due to the implementation of the RERA Act, the construction sector was badly affected and 60% of our portable power tools cater specifically to that segment,” he explains while adding that he expects a mid-single digit growth this year. Joshi adds that the company will continue with its capex plans for FY19, by adding another shift in October and hiring more people for sales and operations. 

Future in knots
Another industry that is trudging along with its hopes pinned on the reversal of a government regulation is plastic bag manufacturing. For an industry that clocks an annual revenue of Rs.600 crore and employs 2,000 people, these units have been at the receiving end of the Karnataka administration’s blanket ban on plastic items. It is hard for us to tune out the constant purring of plastic film-cutting machines at Vishal Polymers as we make our way to owner Narendra Jain’s office. We assume the noise is emanating from multiple machines, but a walk around the unit reveals that only one seems to be running, while another is peacefully idle in a corner. “The machine should be not lying idle. Earlier we would produce 40-45 tonne of plastic packets/bags a month; now that has reduced to 20 tonne. My debt has gone up to Rs.30 lakh and my turnover has seen a drastic fall. I was doing well in 2015 making Rs.3 crore a year, now we’re back to 2013 level of Rs.1.3 crore,” he laments.

Jain remembers when things changed for him. It was on May 4, 2016 when the city’s municipal body, BBMP, issued a notice banning all plastic items such as carry bags, cups, spoons and sheets, among other things. Karnataka is among the 17 states and union territories that issued a ban on plastic items in 2016. Entrepreneurs like Jain were faced with two options — find more clients for industrial plastic packaging or switch to an alternative. “Paper, the only alternative is not feasible since it is even more harmful to the environment,” he argues. 

Ashwath Narayan Rao, treasurer, Peenya Industries Association and the owner of Shiva Poly Pack, explains that the local municipal’s body’s inability to collect and segregate municipal waste is being conveniently glossed over. “Of the 150 plastic carry bags units, 20-25 have shut shop since the ban. The rest of us have shifted to industrial packaging, but there are too many players in that segment now. As a result, our margin has come down to 5% from 25% earlier,” says Rao, who now supplies to Bharat Electronics, TVS and other local kirana stores. Both the manufacturers hope that a change in regime in the upcoming state elections may lead to the ban being revoked.  “I have given myself a year as I can’t shut shop just like that. I have about 38 people working for me. All we can do is hope that the ban is reversed,” Jain concludes.

Apart from a review of existing state norms that govern the functioning of units in Peenya, there is an increasing demand for better infrastructure and industrial plots at subsidised rates. Malayadri Reddy, the current president of the Peenya Industries Association, says, “The industrial clusteremploys a million people, yet the very basic requirement for a manufacturing hub to flourish — land — is not available either from the state or the central government.”

In 2010, there were news reports about the state government announcing an extension of the existing cluster and establishing what it called the Greater Peenya Industrial cluster, but as of now those plots remain only on paper. Land, labour and cheap finance seem to be what most of the SMEs here need to get to the next phase of growth. Makal of Essem says, “Many of our cluster members have approached nationalised banks for the Pradhan Mantri Mudra Yojana and Credit Guarantee Schemes, but it involves a lot of paperwork and needless delay; they have miserably failed at obtaining a loan.” 

The Karnataka state government is known for its ‘Bhagya’ welfare schemes providing subsidised food supplies, healthcare and clothes for people below the poverty line. But as one SME owner says wryly, “The state government has provided for the bhagya of every other segment of the population, but they haven’t paid heed to the industry’s bhagya”.