How will India's urban landscape shape the future of its capital goods industry?

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Industry Overview

The capital goods industry plays a crucial role in economic growth by designing, manufacturing, and distributing machinery, equipment, and infrastructure used for producing other goods and services. According to the World Bank, by 2036, 600 million people will be living in urban cities in India, representing approximately 40% of the population. India needs to invest INR 68,40,000 Cr. (US$840 billion) over the next 15 years into urban infrastructure to meet the needs of its fast-growing population. The capital goods sector will experience a new growth cycle driven by both traditional and new-age industries.

Government Initiatives to Boost the Capital Goods Sector

  • Railways: A capital outlay of INR 2.55 lakh Cr., a 5.8% increase over FY24.
  • Solar Power Grid: Allocation increased to INR 8,500 Cr.  in FY24 from INR 4,970 Cr.  in FY23.
  • Department of Telecom: Interim Budget 2024-25 allocated INR 1,11,876.6 Cr.
  • Ministry of Housing and Urban Affairs: Outlay of INR 77,523.58 Cr.
  • Civil Aviation: 15 airport projects worth US$12.1 billion to be inaugurated by 2028.
  • Roads: Allocation of INR 2.76 lakh Cr.

These initiatives aim to create a conducive environment for investment, and stimulate domestic manufacturing in the capital goods sector.

Key Drivers and Investment Thesis

1. Gross Fixed Capital Formation (GFCF):

GFCF as a percentage of GDP reached a multi-year high in Q3 FY24, driven by government spending with public capex increasing at a CAGR of 23% from FY18 to FY25. Private GFCF is showing signs of revival, contributing to overall GFCF growth, with manufacturing capacity utilization reaching nearly 75%.

2. Public-Private Partnership:

In January 2024, the Government of Maharashtra and NTPC Green Energy Limited (NGEL) signed an MoU for green hydrogen and derivatives development, including 2 GW of pumped storage and 5 GW of renewable energy projects, with a potential investment of INR 80,000 Cr.

3. Logistics and Warehousing Sector:

India aims to improve its Logistics Performance Index ranking to 25 and reduce logistics costs from 14% to 8% of GDP by 2028. The warehousing market is expected to grow to INR 2,24,379 Cr by 2026, at a CAGR of 10.90%.

4. Railway Sector Upgrades:

Indian Railways aims to increase its freight share from 27% to 45% by 2030, with significant investments in rolling stock and modernization initiatives like Vande Bharat trains.

5. Industrial Automation:

The adoption of Industry 4.0 technologies and the government's PLI scheme, which aims to attract INR 5,50,000 Cr in investments by FY28, drive growth in factory and process automation solutions.

6. High Data Center Demand:

Driven by rising personal data consumption and industrial digitalization, the segment is projected to grow at a 20% CAGR until FY26.

Major Players in the Capital Goods Industry

1. Siemens India:

  • Company Background: Siemens India is a 75% subsidiary of Siemens AG, Germany, which has a presence in more than 200 countries. Siemens offers diverse products and services solutions in power generation, transmission & distribution, automation & drives, and industrial & digital solutions. Siemens has 22 factories located across the country, eight Centres of Competence, 11 R&D centers, and a nationwide sales and service network.
  • Order Book: All-time high of INR 46,100 Cr.
  • Key Orders: Received an INR 26,000 Cr order from Indian Railways for 1,200 electric locomotives of 9,000 HP.
  • Energy Segment Demerger: Energy had INR 5,990 Cr in revenues and EBITDA margin of 12.7% as of FY23. Process expected to be completed within CY25 (both demerger and listing of Siemens Energy).
  • Capex: INR 330 Cr investment for expansion of GIS factory in Goa, will go live by Dec-26. These will be used in data centers, rail & metro, O&G, steel, T&D, etc. INR 190 Cr investment for metro train manufacturing in Aurangabad will go live by FY27.

2. ABB India:

  • Company Background: ABB India is a key subsidiary of the global ABB Group which holds a 75% stake in ABB India. ABB offers products, systems, software, and services for the automation and optimization of discrete, process, and batch manufacturing operations, and related services.
  • Revenue and Gross Margins: Q1CY24 sales growth of 27.8% YoY to INR 3,080 Cr. GM improved by 380bp YoY to 42.8% (higher services mix/ pricing benefit of low commodity cost cycle).
  • Order Book: Base orders were received at INR 3,230 Cr during the quarter and large orders were of INR 370 Cr.
  • Cashflow: Robust cash position at INR 5,040 Cr.

3. Cummins India:

  • Company Background: Cummins India Limited comprises three business units - Engine, Power Systems, and Distribution. The Engine Business manufactures engines (125 to 400 HP) for low, medium, and heavy-duty on-highway commercial vehicle markets and off-highway commercial equipment industry spanning construction and compressors (49HP to 430HP). The Power Systems Business designs and manufactures robust engines with a horsepower spectrum ranging from 700 HP to 4500 HP.
  • Revenue: Total Sales for the FY24 at INR 8,816 Cr. increased by 16% compared to the last year.
  • Net Profit: Profit after tax at INR 1,661 Cr. in FY24 is higher by 47% compared to the previous year.
  • Emissions Compliance: Transition to CPCB 4+ norms from 1st July 2024, covering 70% of its products.

4. Bharat Heavy Electricals (BHEL):

  • Company Background: Bharat Heavy Electricals Limited (BHEL) is India’s premier state-owned public sector enterprise and flagship engineering and manufacturing company. With 16 manufacturing facilities spread across the country, BHEL ranks one of the highest in India's capital goods manufacturing space.
  • Annual Revenue: INR 23,900 Cr, up 2.3% YoY.
  • Annual PAT: INR 300 Cr, down 42% YoY.
  • Market Share: Won 30% of the 130GW tenders and expects similar success with the upcoming 100GW tenders.

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