Government to Frontload Capex in Capital Goods

Government to Frontload Capex in Capital Goods | 5paisa

Market Outlook
by Shreya Anaokar Last Updated: 2022-06-28T17:20:05+05:30

Contrary to expectations that the government will cut excise duty and increase fertilizer subsidy would prompt curtailing Capex spending, the government is focusing on frontloading Capex for FY23 and expects to spend 60% of the Capex pegged for FY23 in H1 itself. To support the argument, in April 2023, the Capex spending grew by 67% by lending segments like railways and roadways. 

Also, fresh investments announced in FY22 have almost gone up twice to Rs.19.3 lakh crore vs Rs.10.8 lakh crore in FY20. The fruition of the above investments will lead to increased order flows for the capital goods sector.

All capital goods companies in aggregate have witnessed 64% YoY growth in order inflows coupled with a strong backlog. A pick-up in execution can lead to 15-18% growth in revenues for FY23 and FY24. The order inflows are coming from various different sectors like railways, roadways, power transmission and distribution, digital automation, renewable sector, cement, oil & gas, etc, which reduces the risk of concentration.

Steel is a primary raw material for all companies whether (Engineering, Procurement, and Construction) EPC-based or product based. Product-based companies have been successful in passing on input price pressure in a significant way whereas EPC companies lagged in terms of passing on in FY22. However, with steel prices already softening, margins of EPC companies are also likely to recover from FY22 levels thereby aiding revenue growth.

Product companies will not get impacted by rising interest rates given most product capital goods companies are debt-free and cash-rich. As far as EPC goes, the working capital cycle has improved substantially over FY20-22. Most of them are at comfortable leverage but any rise in finance costs will get cushioned by operational growth. For instance, an EPC company like Thermax is completely debt-free while a behemoth like L&T (barring L&T finance) has tiny debt on the balance sheet.

In April 2022, the cumulative capital spending of all departments and ministries was Rs.78,925 crore, up 67.5% YoY. Out of this, Rs.58500 crores was spent on the roads and railways sector which has the highest allocation in the budget. The share of private investments in fresh projects has risen to 68% in FY22 from 55% in FY20. The same is reiterated by L&T where the share of private clients is up to 19% in FY22 from 13% in FY21. Fresh project investments have almost doubled from FY20 levels, with private shares coming with a strong rebound.

 

Top bets in Capital Goods Space

L&T:

L&T’s strong order book of Rs.357600 crore suggests good revenue visibility in the coming years. The company has come out with a five-year plan called “Lakshya 2026”. In that L&T will focus on emerging portfolios like Green EPC, manufacturing electrolyzers, battery & cell manufacturing, data centers, and platforms (Sufin & Edutech). L&T has become more selective in choosing business opportunities coupled with a strong backlog gives convenience to the company to use discretion for winning relatively profitable orders, going forward. 

 

Siemens

It operates mainly in five key segments including energy/gas & power (34%), smart infrastructure (33%), digital industries (22%), and mobility (7%). A 61% growth in order book with order backlog at an all-time high at Rs.17174 crores is seen improving growth visibility, going ahead. Siemens has a strong focus on technology leadership in digitization and automation products to further strengthen its market share. Strong demand for short-cycle products with clear traction from steel, cement, chemical, pharma, and fertilizer industries to drive strong growth and margin expansion in smart infrastructure and digital industry segments. 

 

Timken India:

Timken India is into the manufacturing, distribution, and sale of antifriction bearings, primarily tapered roller bearings and cylindrical roller bearings. It is in the power transmission product brands and also offer products to defense, mining, aerospace, agriculture, rail, energy, and automotive industry. It has a revenue breakup of 75% from domestic sales and 25% from export. Timken has a strong balance sheet coupled with decent growth prospects led by strong growth in railways, wind, and exports. The announcement of 400 Vande Bharat trains and 90,000 wagons in the next three years will help Timken to utilize the railways' segment capacity, which is hovering around 55-60%. The domestic market is also robust on the back of the Capex cycle, power, infra, and mining look brighter.

 

Bharat Electronics:

Bharat Electronics (BEL) is a leading aerospace and defense electronics company. It primarily manufactures advanced electronic products. The company’s order book is at Rs.57,570 crores as of March 2022 ending after bagging contracts to the tune of ~ Rs.19,200 crores in FY22. BEL is well placed to benefit from the government’s strong indigenization push in the defense sector. The healthy order backlog at 3.7 times FY22 revenues provides strong earnings visibility. Moreover, the company has a strong pipeline of orders and expects big-ticket size orders in the coming period. The company’s strategy to diversify into non-defense areas and focus on increasing exports and services share would further aid long-term growth and help de-risk its business.

 

AIA Engineering:

The company is the second-largest hi-chrome producer in the world. New mining customer acquisition is expected to pick up as the travel situation has started to normalize and will allow AIA to gain incremental volume growth in coming years despite the likely base volume impact due to anti-dumping in Canada, and South Africa. The company is focusing on key geographies like Central America, Latin America, the entire African region, Australia, and CIS. AIA’s mill lining capacity addition of 50000 MT is likely to be completed in June 2022. Post this expansion, the total capacity will become 440000 TPA. Additional 30000-40000 tonnes extra volumes may come from this new capacity, going forward. The company has decided to go ahead with its brownfield capacity expansion of grinding media. It plans to add 80,000 MT of capacity at an estimated Capex of Rs.200 crore and commission it by the end of FY24.

 

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About the Author

Shreya Anaokar is a Content Writer at 5paisa. She has completed her Master’s in Finance and Graduation in Statistics from the University of Mumbai. 

Disclaimer

Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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