Clear all


No Data Found


No Data Found
Download the latest issue of Business Today Magazine just for Rs.49
What is driving the massive boom in the capital goods sector?

What is driving the massive boom in the capital goods sector?

Increased government spending, coupled with digitalisation and the impressive performance of public sector undertakings, has aided the boom in the capital goods sector, further spurring companies operating in the space to perform well on the bourses

Increased government spending, coupled with digitalisation and the impressive performance of public sector undertakings, has aided the boom in the capital goods sector, further spurring companies operating in the space to perform well on the bourses Increased government spending, coupled with digitalisation and the impressive performance of public sector undertakings, has aided the boom in the capital goods sector, further spurring companies operating in the space to perform well on the bourses

When the more intricate pieces of a jigsaw fall into place, completing the rest of the puzzle becomes a breeze. It is an apt metaphor for the present condition of the Indian capital goods industry. Look at it from the vantage point of Covid-19 and you’ll see an industry that was marred by pessimism and slow order inflows before the pandemic. Growth of companies, especially those owned by the government, remained elusive and bogged down by unimaginative thinking. But, cut to the present and you witness a sector that is firing on all cylinders, with growth returning with a zeal. This has also rewarded investors who’ve shown patience.

So, what has wrought the positive change? For starters, the government’s support—in terms of improved policies, increased budget allocation, and somewhat unexpectedly, big orders from government-owned entities—has worked wonders for the sector. Of course, help from the government is only part of the story.

The other aspect is the tremendous agility that capital goods firms have shown, which has not only helped them complete their projects on time, but also beat deadlines. Moreover, these firms have also made strategic bets by acquiring peers to gain a meaningful foothold in their sectors, kept their focus on supply chains to better control costs, and consequently, improved their margins. Moreover, from an external point of view, stable commodity prices have also helped their cause. In all, their numbers tell a story of robust growth, with ample headroom for more—available on the back of bigger projects, a thrust on digitalisation, and the government’s higher capex outlay. But, the industry’s good run is not just restricted to private sector players; it extends to government-owned firms as well.

Even as the sector has shown significant progress in recent times, the strategy across companies has been markedly different in each case. For instance, Siemens Ltd has focussed on localising and expanding its mobility portfolio to bag large orders. Sunil Mathur, the company’s MD and CEO, cites orders like the one worth Rs 26,000 crore from the Indian Railways—to manufacture and maintain 1,200 locomotives—and the multiple orders from the metro projects in Mumbai and Ahmedabad, as big wins emanating from the company’s renewed focus.

Meanwhile, for ABB India, the last four years have been about transforming its portfolio and decentralising its businesses. “A majority of our products are now fast-moving industrial goods, combined with focussed service businesses,” says Sanjeev Sharma, its Country Head & MD, adding that the company has now expanded into 23 market segments to make the most of the government’s focus on infrastructure.

Consequently, as a cyclical sector, there are now factors working in favour of the industry. Sanjay Moorjani, Research Analyst at Samco Securities, says a big driver for the space today has been the 75 per cent capacity utilisation visible in the manufacturing sector. “The private sector deleveraging its balance sheet, combined with the ‘China plus one’ strategy, has helped with the surging orders,” he adds.

Even the usually conservative public sector undertakings (PSU) have benefitted from the government’s thrust on improving the country’s infrastructure and fast-tracking of projects. Amit Anwani, Research Analyst at Prabhudas Lilladher, cites Hindustan Aeronautics’ order book of over Rs 80,000 crore, or Engineers India’s orders growing Rs 1,500 crore to over Rs 4,500 crore in the past two years to drive home the point. “Even BHEL (Bharat Heavy Electricals Ltd) has a significant opportunity to enhance capacity and rationalise costs,” he adds.

Although, historically, government-owned entities have been bogged down by poor fundamentals, including in operational performance, they’ve improved significantly in recent times. “There has now been an effort towards debt reduction, an emphasis on indigenous defence production, and localisation, resulting in improved fundamentals. Plus the order book has taken off, ensuring revenue visibility,” Anwani points out, while adding that most of the future growth appears to be already priced in the current valuations.

Those tracking the capital goods story are convinced that demand will continue to remain strong for a while. And it is not just one segment of the economy that is driving it, they say. For instance, Anwani lists out the development of metro projects across cities, the electrification and digitalisation opportunity across sectors, and the roll-out of 5G and BharatNet, as some of the factors spurring demand for capital goods. “The higher demand for capital goods is not being driven by conventional, but transformational capex,” he says. That also includes a segment like railways—that now offers a better product mix comprising high-speed trains.

ABB’s Sharma concurs that the government’s capex has been a major catalyst for growth. “The railways’ electrification and metro expansion is a direct net positive [for the industry], while infrastructure spending and proactive industrial policies have benefitted multiple market segments, and expanded our customer base as well,” he says.

On the other hand, the public sector has contributed around 15-20 per cent of the new orders for Siemens in FY21 and FY22, says Mathur, adding that the government’s spending on public infrastructure is crucial for the industry to remain on a high growth path. “Private capex has followed government investments. We are now at the cusp of a new private capex cycle, and investments are coming into new-age technologies such as semiconductors, fuel cells, batteries, data centres and hydrogen,” he adds.

For much of that to materialise, a key enabler will be the digitalisation drive that is required to achieve decarbonisation and sustainability targets, while pushing productivity and quality parameters. “Today, customers want to adopt energy efficiency and digitalisation measures for all this. It has led to an increase in the industrial digital business for most companies, and that is expected to continue,” says Mathur. ABB’s Sharma concurs. He reckons that digital capabilities can be leveraged to drive the productivity of each of his businesses. “Our operations and customers can take advantage of the data extracted from our assets to make more informed decisions. AI and analytics are then fed that data over a period of time, which results in productivity gains,” he explains.

While the digitalisation drive is certainly helping the industry, some companies are also taking the mergers and acquisitions route to gain a foothold in various segments of the market. For instance, RHI Magnesita India, a player in the refractory business that had been growing organically, and primarily servicing its steel customers till recently, acquired Dalmia OCL in late-2022 to strengthen its non-core businesses. “To strengthen our position in the non-steel segment and cover segments like cement, glass and copper, among others, Dalmia OCL fit in to fulfil that ambition,” says Parmod Sagar, the company’s MD & CEO.

According to him, there is now a new business vertical to service the refractory needs of the Indian iron-making industry. Soon after its acquisition of DOCL, the company acquired the refractory business of Hi-Tech Chemicals to boost its product portfolio not just in India, but also in the Middle East and Africa. Siemens, too, made a move in this aspect this May by picking up the electrical vehicles division of Mass-Tech Control, a company engaged in the design, engineering and manufacturing of a wide range of AC and DC chargers. “The transaction has been done with an aim to address the growing demand for EV charging infrastructure in India,” says Mathur of Siemens.

Overall, there is little doubt about the India growth story. Consequently, in the context of the capital goods story, RHI Magnesita’s Sagar says he is optimistic about demand for the sector sustaining from segments like steel, cement and glass for some time to come. “The government’s vision of becoming a $7-trillion economy by 2030, along with steel production hitting 300 million tonnes, and the Atmanirbhar Bharat initiative, will continue to spur economic and infrastructure development in India,” he adds.

By the looks of it, the script of the Indian capital goods industry looks solid, and now, a lot depends on execution. If that too falls into place, the capital goods story has all the markings of giving blockbuster performances over the next few years. 


The full BT500 List can be accessed here

Published on: Nov 27, 2023, 4:54 PM IST
Posted by: Priya Raghuvanshi, Nov 27, 2023, 2:11 PM IST