BHEL, Hitachi Energy, other capital goods stocks fall for 3rd day as China companies may bid for govt contracts; brokerages allay fears

BHEL, Hitachi Energy, other capital goods stocks fall for 3rd day as China companies may bid for govt contracts; brokerages allay fears

• Capital goods stocks fell over fears of Chinese firms bidding for government contracts.
• Brokerages say impact on Indian firms may be limited due to localization push
• Partial recovery seen after US envoy's comments eased market concerns

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Capital goods stocks fell for third straight day after a report said that the government may allow Chinese companies to bid for government contracts, particularly in infrastructure, power and manufacturing.

Shares of Cummins India, BHEL, Hitachi Energy, Transformers and Rectifiers (India) Ltd fell up to 5% on January 12 even as brokerages said the fears over Chinese participation, if allowed, are overblown.

Later in the trading session a partial recovery was seen in these stocks as US Ambassador to India Sergio Gor's comments triggered a massive recovery in the markets.

Shares of Hitachi Energy India fell nearly 6% to a one-month low of Rs 16,840 apiece. The stock was down for the third straight session and had shed 14% during this period.

Last week, Reuters reported that Centre is considering rolling back the 2020 procurement restrictions that limited Chinese companies from bidding for government contracts, following easing diplomatic and border tensions with China. The move may aim to revive competition, reduce costs, and speed up execution of public and private projects, particularly in infrastructure, power, and manufacturing.

So, how bad will it get for Indian capital goods companies if the Chinese companies are allowed to participate to bid for government contracts.

"Our interactions with industry experts reveal that the relaxation would be most likely aimed at easing supply-chain constraints and improving project execution, rather than increasing OEM competition. This view is underpinned by (1) the government’s aggressive push for localization in power equipment over the past few years 2) Substantial capex announcements from power generation and transmission equipment players and 3) the strategic importance of power grids to national security," said domestic brokerage Systematix.

"Within the power generation equipment space, we expect limited impact on the transformer, switchgear, substation and grid automation businesses (GE Vernova T&D, Siemens Energy, Hitachi Energy, TARIL and CG Power). Even though BHEL has the greatest overlap with Chinese OEMs in terms of product offerings, its order book provides visibility of over 7 years, shifting the focus toward execution and margin realization of its prevailing order book. While L&T has some overlapping businesses, the impact could be limited, given its existing competition with Chinese players in the Middle East and significant exposure to the services-led businesses," added Systematix.

The brokerage also weighed on strategic importance of the national power grid amid rising cyber threat.

"Power grids are strategically critical national assets and high-value targets, as power outages can simultaneously disrupt hospitals, railways, telecom networks, data centers, water systems, finance, and defense facilities. At the same time, grids are becoming increasingly digital, automated and remotely operable. Extremely sensitive areas include grid automation systems, SCADA/EMS platforms, etc. Given these considerations, impact of policy easing on transmission players such as GE Vernova T&D, Hitachi Energy India, Siemens Energy, TARIL, CG POWER) could be limited. Also, given that the globally third largest Chinese player, TBEA has a capacity of 200 GVA (less than 5% of India’s transformer industry), the impact could be limited to that extent," said Systematix in its note.

Domestic brokerage PL Capital said Chinese participation is likely to remain limited.

"We believe BHEL and L&T could face incremental competitive pressure in the BTG (Boiler, Turbine, and Generator) segment if Chinese players are permitted to bid for government contracts, given their historical involvement. However, due to the strategic sensitivity and control risks associated with critical infrastructure projects, Chinese participation is likely to remain limited," it said.

"We believe that even if Chinese players are allowed to participate in the power equipment segment, the government is likely to mandate local manufacturing for such players. In contrast, recently CEA’s recent notification to localize 16 critical components—including switchgear, insulators, and voltage transformers - is expected to support the domestic T&D cycle, curb low-cost dumping by Chinese suppliers, and reduce India’s high import dependence, thereby structurally benefiting domestic T&D manufacturers such as CG Power, Siemens Energy, Hitachi energy, GE Vernova T&D India," added PL Capital.