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Research The Signal Unlocking Growth: Capital Goods on the Rise

Unlocking Growth: Capital Goods on the Rise

Written by - Fisdom Research

May 25, 2024 6 minutes

The Indian economy is widely considered to be in an early recovery phase, characterized by low inventories, high inflation, and rising interest rates. Businesses, cautious from past experiences, maintain lean inventory levels that may quickly change as demand picks up. Rising input costs and global factors are driving inflation upwards, benefiting sectors like commodities and energy. However, high interest rates, due to factors like high debt in the US and Europe, post-COVID economic slowdown, geopolitical issues, and supply chain disruptions, impact interest-rate sensitive sectors such as real estate and capital goods manufacturers. Currently, the majority of capital expenditure (Capex) is driven by government spending. Additionally, increased Capex spending by the private sector and heightened industrial activity can significantly boost the capital goods sector.

The outlook for the capital goods sector remains strong, driven by ongoing industrial and infrastructure investments, and increased allocations in textiles, construction materials, metal products, and machinery, which are expected to generate significant order inflows. Although there are concerns about margin pressures due to certain raw materials and high valuations, the earnings growth forecast for FY25 is promising, with the S&PBSE Capital Goods Index expected to grow by 25%. Higher earnings are anticipated in the second half of FY25, presenting a solid investment opportunity in the sector.

In recent weeks, several infrastructure and capital goods companies reported their March quarter (Q4FY2024) results, showing notable revenue growth and boosted profits due to economies of scale and lower input costs. However, a closer look at their performance and management commentary provides insights into the state of the economy and the progress of various industries.

Key Announcements

Siemens Ltd: Announced the demerger of its energy business. Plans to invest INR 1,000 crore over the next two to three years to expand capacity in two of its 32 facilities.

Focus areas: components for industry, infrastructure, power distribution, and a new metro train manufacturing facility.

ABB Ltd: Positioned to benefit from private capital expenditure, industrial automation, production-linked incentive (PLI) schemes, increased energy demand, and technological efficiency.

Revenue and profit growth driven by electrification products tied to infrastructure sectors.

Larsen & Toubro: Q4FY2024 performance showed strong infrastructure activity.

Large government metro rail and power projects contributed to a 22% year-on-year revenue growth.

Kalpataru Projects International: Highlighted buoyancy in infrastructure tendering, including underground metro tunneling, airport projects, and power transmission and distribution (T&D).

Government Initiatives

The government’s continued capital allocation in infrastructure projects significantly drives the order flows and revenue expansion of capital goods companies. Key areas of investment include:

Railways: Utilized about 80% of its FY2024 capex target by December 2023.

Private Sector Developments

Data Centers and Renewables: Private sector investments are focusing on data centers and renewable energy solutions, reflecting the need for environmentally friendly technologies.

Challenges for the sector:

Order Deferrals: Siemens noted some large order deferrals, possibly due to elections that temporarily stall public sector activity.

Thermax Performance: Missed out on large order inflows in FY2024 due to delays in decision-making and erratic consumption patterns in sectors like sugar and steel.

Industrial Automation Slowdown: Normalization of demand post-pandemic led to reduced wait times for components, causing slower order flow as private sector firms draw down existing inventory.

Future Prospects

CompanyKey Highlights
Siemens LtdINR 1,000 crore investment in capacity expansion; focus on industry, infrastructure, and metro trains.
ABB LtdGrowth in electrification products; benefits from private capex and energy demand.
Larsen & ToubroStrong infrastructure activity with 22% revenue growth from government projects.
Kalpataru Projects InternationalIncreased tendering in metro tunneling, airport, and power T&D projects.

Most capital goods firms are optimistic about long-term growth driven by infrastructure-led orders, reflected in the gross domestic product (GDP) expansion. Despite potential short-term order inflow disruptions due to political uncertainties, the overall outlook remains positive.

Investor Considerations

Investors should note the potential peaking of profit margins due to inflationary pressures, leading to higher input costs and persistent interest rates. Despite this, the long-term infrastructure growth story remains intact, providing numerous opportunities for capital goods firms.

In conclusion, the infrastructure and capital goods sectors in India are poised for sustained growth driven by government and private sector investments. While there are some short-term challenges, the overall trajectory suggests robust demand and expansion in the years to come.

Market this week

 20th May 2024 (Open)24th May 2024 (Close)%Change
Nifty 50₹ 22,405₹ 22,9572.5%
Sensex₹ 73,843₹ 75,4102.1%
Source: BSE and NSE
  • In a shortened trading week, Indian benchmark indices surged by 2%, hitting new milestones with the Nifty surpassing 23,000 for the first time.
  • The rally was driven by broad-based buying, FII support, and mixed corporate earnings.
  • All sectoral indices closed positively: BSE Capital Goods index rose 4.7%, BSE Telecom index increased by 3.4%, and Metal, Power, Oil & Gas, and Realty indices each added 2%.
  • Foreign institutional investors (FIIs) sold equities worth Rs 1,165.54 crore, while domestic institutional investors (DIIs) bought equities worth Rs 6,977.71 crore

Weekly Leaderboard

NSE Top GainersNSE Top Losers
Stock Change (%)Stock Change (%)
Adani Enterprises10.63 %Sun Pharma(2.95) %
Coal India6.66 %Nestle India(1.46) %
CIPLA5.87 %HDFC Life Insurance(0.76) %
Adani Ports & SEZ.5.66 %Apollo Hospitals(0.67) %
Divid’s Lab4.92 %SBI Life Insurance(0.25) %
Source: BSE

Stocks that made the news this week:

  • Six Adani Group stocks, including Adani Enterprises Ltd, Adani Green Energy Ltd, and Adani Ports & SEZ, have recovered from the losses caused by the Hindenburg report and are now trading above their January 2023 levels. However, Adani Total Gas, Adani Energy Solutions, Adani Wilmar, and NDTV remain below their pre-Hindenburg levels, with Adani Total Gas down 74%, Adani Energy Solutions down 59%, Adani Wilmar down 35%, and NDTV down 11%.
  • Divi’s Laboratories Ltd reported a 67% increase in consolidated net profit to Rs 538 crore for the Jan-March quarter of FY24, up from Rs 321 crore in the same period last year. The company’s revenue grew by 18% to Rs 2,303 crore, compared to Rs 1,951 crore a year ago. EBITDA rose to Rs 731 crore from Rs 473 crore, with the EBITDA margin expanding to 31.7% from 25% year-on-year.
  • Landmark Cars Limited shares fell 7% to Rs 713 after the company reported a significant decline in net profit for the March quarter. The luxury car dealer’s net profit plummeted over 54% year-on-year to Rs 11 crore, compared to Rs 24.26 crore in the same period last year. On a quarter-on-quarter basis, net profit dropped more than 40% from Rs 18.5 crore.

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