09 Aug 17 Capital goods industry revival – Are any green shoots visible?

The first quarter results have been a mixed bag so far. Yet, the Indian stock markets have reached an all-time high. While this is an ideal scenario, things don’t seem to be moving as anticipated.

  • IIP numbers – The index of eight core industries grew at its slowest capital goods industrypace since February at a meagre 0.4 % in June 2017, compared to a robust 7% expansion in the same period last year. It grew by 4.1% in May 2017.
  • Bank credit growth – According to the RBI, credit growth plunged to a six-decade low of 5.08% in FY16-17, as against 10.7% last year.
  • 1QFY18 results – According to a Motilal Oswal report, though most of the companies have announced results in line with expectations, of the 31 companies that had shared results till 31 July 2017, MotilalOswal felt like downgrading 21 of them.
  • Poor private investment – Fresh investments by the corporate sector hit a new low in fiscal year (FY) 2016-17. According to a news article in the Business Standard, the capex of top 1000 non-financial firms in India (as % of revenue) grew by just 5.8% in FY17 – growing at its slowest pace since 1992. The previous capex growth low was in FY1999-2000, after the dotcom boom in 2000.

The future will depend on the investments and performance of the capital goods industry, a harbinger of economy growth.

Since the last two years, the capital goods industry has not witnessed any growth. Order books are mostly stagnant or, at times, declining. The core industries – steel and cement – are reeling with 60-70% of the capacity utilization, and as a result, they are not expanding their capacity.

The markets are a good barometer of the future economy, and good news is typically discounted by the market way before the economy starts getting better.

I believe that things are beginning to improve… but at a gradual pace. In the medium term, capital goodscapital goods industry investments will not go into traditional sectors like steel and power, as they are over levered and have over capacity.

Each investment cycle has its own unique drivers. Therefore, one has to look at green shoots – not in the historical capital guzzling sectors but newer ones. For instance, it is quite possible that companies in other sectors will lead the next upturn in private sector investment.

  • The logistics sector could attract fresh investments due to the new GST regime.
  • Investments in roads – The initial budgetary allocation for Ministry of Road transport and Highways in 2017-18 is Rs. 91,000 crores.
  • Oil and gas will see investments on account of modernization of refineries. According to the Business Standard, the three public sector oil refiners will have to invest Rs. 30,000-35,000 crore over the next four years to produce auto fuels that will comply with BS VI emission norms.
  • There was a USD 60 bn growth in FDI in FY2016-17, up from USD 36 bn in FY2013-14. Though the bulk of it was committed to the services sector, there were also investments in the auto sector, which might drive some investments into the capital goods space as well.

There seems to be a silver lining in the dark clouds for some of the major capital goods companies. If one takes a look at the order book position in 1QFY18, it seems to be improving.

Source: Company Filings




Maybe the green shoots appear ephemeral today, but usually when the cycle is turning, it happens very gradually. Let’s see how this unfolds…

Rathin Shah

I am currently a project manager at ValueNotes. For the past 8 years I have worked on custom research projects in the technology and engineering space. You can contact me on rathin@valuenotes.co.in or over my LinkedIn profile

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