DBE Limited: Strategy for small diesel engines business unit

Mr. Vinod Bakshi, Unit Head, Diesel Engine Business of DBE Limited was busy preparing reports for an upcoming
meeting with Mr. Paresh Bhatnagar, CEO of DBE Ltd. It was mid of June 2022, and this meeting was scheduled
for discussing the Annual Operating Plan for the upcoming year. Mr. Paresh Bhatnagar had pointed out the declining
sales of diesel engines in recent years and raised concerns over the future of the said business. Now, while preparing
reports, Mr. Bakshi noted that there was a steep decline in profitability figures corresponding to the pump set sales
over the last ten years.

Being the major manufacturer of the small diesel engines and pump sets, DBE Ltd. has developed its expertise in
diesel engines for small construction equipment over the years and has earned the reputation for its quality. Small
diesel pump sets are largely used by the farmers for irrigation and most of them have switched to electric pump sets
owing to the increasing availability of electricity in rural areas. This alternative of an electrical option has also
resulted in higher conversion costs of potential customers. Mr.Bakshi was sure of continued business in this segment
as other competitors were exiting the business. There was a scope for growth in the construction equipment industry
on account of infrastructure developments taking place in the country. Mr.Bakshi was debating how to propose a
short term and long term strategy for this division of small diesel engines.

DBE Limited

DBE Ltd. makes small engines which are used in agriculture and agro industrial segments. These engines are used
in various applications like water irrigation pump sets, prime movers for small construction equipment, generators,
etc. These are generally light weight engines in the range of 4 hp to 14 hp which are easy to relocate or move. This
strategic business unit (SBU) has been going through a downward trend since the last 7 to 8 years due to the pump
set segment moving toward electricity-driven pump sets. This segment was one of the major applications for small
diesel engines. DBE Ltd. has its own manufacturing plant at Rajkot with the capacity of 8000 units per month; there
are around 200 employees working in this unit. They have their own marketing team of around 20 managers located
across the country who are handling the business through a channel network of around 250.

Industry background and competitors

Small engines business industry was 6 lakhs + engines in 2012 and has declined drastically to 1.5 lakh engines pan
India. The industry numbers are divided in the following segments: pump sets, small construction equipment,
generators and other sundry applications. In the past years, there has been a decline in sales of engines in all
segments except small construction equipment.

This decline is majorly due to conversion of the pump set segment to the electric pump set segment. Engines were
majorly used in irrigation where there was a scarcity of electricity in rural areas. Over the period of time and in step
of modernization in our country, solar energy and electrification gradually increased which resulted
in diesel engines being replaced by electric monoblock.

The competitors have also decreased by 50 % in these past years including both organized and unorganized players.
DBE Ltd. has around 30% market share in the last couple of years and is trying to increase it as its one of the major
competitor IJK Ltd. has exited the business in 2022. Most of the small manufacturers have moved away from diesel
engines to other product segments barring few in the Rajkot, Agra and Punjab clusters. DBE Ltd. being the leader
in the industry, the cost of production is comparatively higher and commands around 20 to 30% premium over the
competing brands.

The major competitor’s ABC Industries and MNO Corporation were also under heavy pressure and were finding it
difficult to sustain in the small diesel engine business. These competitors have their manufacturing set up in Rajkot
and have been diversifying into electric pump sets and other product segments. Their major sales to the extent of
75% is from the pump sets segment and concentrated in a few northern states. The current annual sales of these two
major players is about 20000 units.

Impact of Declining Industry

Plant capacity utilization: Year on Year, Production de-growth in the plant, average 7% de-growth from FY12,
production from 92,000 engines came down to 53,000 engines. Plant capacity established was 100,000 engines per
annum and last year produced only 32,000 engines (utilization is 32%). On the other hand, the rate of rent has
considerably increased by 10% YoY, due to this the fixed cost keeps increasing.

Supply chain disruption: Due to very low volume and uncertainty in the market of small engines and pump-sets,
many big vendors diversified to other segments i.e. electrical. After GST, pump and base plate segments were in a
downward trend due to high tax slabs. Current vendors have the contractual manpower and due to less volumes it
is quite difficult to sustain the manpower.
Profitability: DBE Ltd’s profitability has sharply declined from EBITDA of 15% in FY 12 to 7% in FY 22. This
has been achieved with a lot of cost control measures in all the areas to the best possible extent. The turnover of
DBE Ltd. has dropped from 300 cr in FY 12 to 120 cr in FY 22.

Questions:

Q.1. What should be the approach of Mr. Bakshi in the given scenario for the upcoming year?

Q.2. What should be the business plan for the suggested approach for FY2023?

Q.3. Elaborate the key actions from the above proposed plan and its implications?

Q.4. What should be the long term (5 Years) strategy for the small engines division of DBE Ltd.?

Exhibits:

Exhibit 1: All India Industry Sales - Last 10 years (4 to 10 Hp) - Sale in units
Company FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
XYZ Ltd 100000 96000 88000 80000 76000 75000 70000 67000 58000 45000 34000

ABC
70000 65000 70000 65000 58000 52000 48000 40000 35000 28000 22000
Industries
MNO Corp. 30000 28000 35000 42000 47000 41000 36000 30000 27000 21500 20000

IJK LTD 60000 52000 48000 45000 42000 37000 35000 27000 25000 22000 9000

Others
(Local +
300000 300000 250000 220000 180000 150000 125000 100000 80000 60000 65000
Chinese
Imports)

Total 560000 541000 491000 452000 403000 355000 314000 264000 225000 176500 150000
 Exhibit 2: All India Segment Wise Industry - Last 10 FY (4 to 10 Hp)- Sale in units

Sales in
NOS FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Pumpsets 410000 400000 380000 337000 300000 250000 220000 188000 150000 100000 70000
Small Const.
Equipements 50000 50000 52000 58000 55000 50000 57000 50000 45000 52000 62000
Alternators
(Gensets) 50000 42000 38000 35000 33000 30000 20000 15000 10000 8500 8000
Others 50000 49000 21000 22000 15000 25000 17000 11000 20000 16000 10000
Total 560000 541000 491000 452000 403000 355000 314000 264000 225000 176500 150000

Exhibit-3 Small Engines No. of Manufacturers ( Cluster wise )

% of Total Production -
Clusters FY12 FY22 Industry
Rajkot 100 12 65
Agra 80 8 15
Punjab 50 10 10
Others 10 2 10
Total 240 32 100