Capital Goods Sector Research
The Indian capital goods sector has grown by almost 2.75 times over the last decade. Despite this growth the sector remains sub-scale. At USD 13 billion of value-add in 2015, the capital goods sector contributes only 0.6 percent to India’s GDP compared to 4.1 percent for China, 3.4 percent for Germany, and 2.8 percent for South Korea. In order of magnitude, the sector’s value-addition in China is 35 times that in India. Imports of capital goods topped USD 30 billion in 2015, a 2x jump over 10 years and contributing 8 percent to India’s total import bill. Capital goods is now the fourth largest import category after crude oil, electronics, and gold. A combination of six interrelated factors – technological depth, fresh investments, talent attraction, marketing and sales capabilities, component-supplier base, and industry-government engagement – have combined to limit growth of the sector in past
The future growth trajectory however could be accelerated. Based on the push under the “Make in India” campaign and the trends in key end-use sectors, there are multiple growth opportunities on the horizon in India for capital goods players. This paper identifies following seven core investment areas and themes that could generate these opportunities:
For the past five years, investments in new asset creation has been largely driven by the public sector and in sectors like roads, railways and other infrastructure segments. New investments from public or private sector has been absent in capital intensive sectors like steel and thermal power due to surplus asset creation done before 2014. As the Indian economy continued to grow at a healthy rate of 7-8% in past five years, increased demand for goods & services led to improvement in system-wide capacity utilisation to 74% (September 2018). However, this period witnessed corporates investing in modernisation/automation and brown field expansions rather than greenfield capacities. Nevertheless, this helped companies operating in manufacturing consumables like machine tools, electrodes, refractories, abrasives, etc in terms of healthy volume growth. We believe current trend of subdued new investment project announcement is only temporary. Indian economy is likely to witness increased investments from both private and public sectors with general elections uncertainty soon getting over, consistent demand for major consumables like steel, cement and power and improving balance sheet of banks.
2. Edelweiss Financial Services