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Capital goods up for a big lift as government, India Inc go aggressive on capex

There are two core drivers of capex in the near term — the National Infrastructure Pipeline (NIP) and capex plans of the private sector driven by multiple sector-specific factors.

November 22, 2022 / 11:12 AM IST
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Indian capital goods industry is set for a big boost in the near term as global giants embark on a ‘China Plus’ strategy to safeguard their supply chains, the government plans heavy infrastructure and manufacturing push and companies dust up their capex plans.

Domestic companies are chalking up huge capex plans to upgrade technology and increase capacities as they sniff a huge opportunity to snatch market share from China in the changing world order.

Experts said while volatility in commodity prices likely hit the investment decisions of major players during Q1FY23, the momentum picked up in Q2FY23 but could have been much higher if the macroeconomic scenario was more positive.

According to a report by global investment bank Credit Suisse, “Investment cycle seems to have skirted the pitfall of macro headwinds and commodity price volatility resulting from the Russia-Ukraine conflict but the momentum needs to strengthen to keep pace with cyclical expectations.”

Investment build-up a positive  

Order inflows, short-cycle revenues of machinery and consumables and capital goods imports together paint a picture that investment cycle build-up is positive.

Credit Suisse says its short cycle capital goods index, which tracks a 20-year trajectory of capital goods businesses, has grown at a 3-year CAGR of 12 percent in September 2022 from 6 percent in March 2022, suggesting strengthening of the investment build-up. The index grew 11 percent in June 2022.

According to Gopal Kavalireddi, Head of Research, FYERS, “The infrastructure and capital goods sector received a solemn boost to its prospects with the central government increasing the capex outlay sharply by 35.4 percent from Rs 5.54 lakh crore in FY22 to Rs 7.50 lakh crore in the FY23 Union Budget. If grants to states are included, then the effective capex rises to Rs 10.68 lakh crore for FY23, amounting to 4.1 percent of the GDP.”

The Prime Minister's Gati Shakti Program to be driven by seven sectors - roads, railways, airports, ports, mass transport, waterways and logistics infrastructure, will offer the necessary impetus to the capital goods sector, Kavalireddi added.

Likely quantum

Since the peak of the investment cycle in 2011 after the global financial crisis, India has not seen any large-scale capex, especially in heavy industries like metals and power. This was despite not so adverse macro scenario as other sectors of the economy continued to attract capex as the Indian economy grew.

The recent past again saw a sluggish capital expenditure in the economy primarily due to Covid-related restrictions. “Other global and domestic factors like supply chain issues, currency movements, geopolitical issues, adverse central bank monetary and fiscal policies, also affected the speed of economic growth,” said Anand Varadarajan, Director, Asit C Mehta Financial Services Ltd.

But things are changing now. Analysts at Credit Suisse peg the total gross fixed capital formation in the Indian economy at about $790 billion. Of this, “we believe that $325-350 billion is large-scale organised capex on infrastructure ($125 billion) and industries ($200 billion) which is addressable as identifiable projects/equipment opportunities,” they said. The rest of the capex is likely to be on public administration and household real estate, which can only be captured by demand in areas such as cement, steel, automobiles and appliances, etc.

Drivers of capex

According to Vikas Gupta, CEO & Chief Investment Strategist, OmniScience Capital, “There are two core drivers of capex in the near term, the Government of India National Infrastructure Pipeline (NIP) and the capex plans of the private sector. In the NIP, roads, railways and power are some of the main drivers of capex plans. The private sector capex plans are across the board with special focus on Clean Tech and PLI-driven capex in mobile, solar, EVs, Battery technology, automobile, pharma, among others."

Divam Sharma, Founder, Green Portfolio said, “We are seeing many mid and large listed companies applying for PLI licences; if we look at the balance sheets, we are very comfortable on the leverage; the capacity utilisation in many cases has been more than 80 percent, the policy has been supportive, while the long-term outlook for India as a market share in global exports is on the rise.” He sees an all-time high capex in this decade with over 7 percent YOY growth.

Apart from the above-mentioned drivers, the current investment cycle is likely to be driven by other multiple sector-specific factors, which across sectors would add breadth to the cycle, making it larger and more sustainable.

Manufacturing could be the sectoral leader in this cycle with a significant push coming from the government and geo-political factors now favouring India. The policy reforms like tax concessions, PLI and duties/import bans are big drivers for investments to capitalise on China+1 sentiments.

Renewable energy is another large area that is likely to witness strong capex momentum given the huge amount of capacity addition required to meet the rising demand. Additional push can come from storage, hydrogen and electrification of transport.

Roads and urban infrastructure assume significance to meet the needs of a growing economy and large-scale investments are being made to improve urban infrastructure, water supply, developing smart cities, etc. Also, the country has now moved to greenfield projects in developing important road corridors / expressways like Mumbai-Delhi and Mumbai-Nagpur, which will significantly reduce travel time between important business centres.

Varied sectors

Real estate is an important player as far as investments in capital goods are concerned. “Low mortgage rates, correction in prices (sharper in real terms) is increasing affordability and real estate contributes to companies like L&T, Ultratech & Havells,” said Credit Suisse analysts.

Many companies in India used the low interest rate regime of the past two-odd years to significantly reduce their debt and become more comfortable with leverage. Buoyed by their strong balance sheets, growing demand and improved profitability, many companies from cement, metals, automobile and telecom have announced large-scale capex plans.

“Logistics, warehousing and data centres is another area which is likely to witness capex on a very large scale,” said the Credit Suisse analysts. According to them, a stronger manufacturing ecosystem, tax reforms and the rise of e-commerce would aid investments in logistics and warehousing. At the same time, increased data handling with localisation norms would aid data centres.

Defence indigenisation will be one of the most important drivers as India aims to significantly reduce $3 billion+ of direct and component imports.

Stocks that can rise

Earnings and multiple upgrades have been seen for several stocks across the capital goods space such as ABB, Siemens and Cummins. According to Credit Suisse analysts, “P/E expansion has been in the order of 20 percent, coupled with 5-10 percent earnings upgrades as well."

In contrast, sectors such as consumer durables have seen earnings downgrades across most names. The cement sector has seen a rerating with some earnings downgrades as commodities corrected.

Credit Suisse prefers stocks in the order of L&T (late cycle and valuation), Siemens (automation, projects, breadth), Cummins (valuation with modest cyclical play), Thermax, and ABB (most expensive). Its other related Outperform-rated stock is UltraTech (beneficiary of commodities and still-attractive valuation).

As per Khadija Mantri, AVP - Research, Sharekhan by BNP Paribas, defence stocks like HAL, BEL should be accumulated on fall as they are the biggest beneficiaries of defence-related capex and indigenisation. Other stocks like L&T (strong order book, improving working capital cycle, asset monetization), Cummins India (strong domestic and exports growth, the scope for margin improvement, CPCB norms would lead to buying), Honeywell Automation (Margin recovery, strong business potential, high cash and debt-free), KSB Ltd (debt-free, NPCIL orders to drive sales) also can be bought from a long-term perspective.

Sharma of Green Portfolio has added Bharat Forge, Finolex Cables and Sterlite Technologies to his portfolio recently. “These stocks fit in our philosophy of growth at reasonable valuations,” he added.

Disclaimer: The views and investment tips of investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.
Gaurav Sharma