The capital goods industry has always been a frontrunner in India’s growth story, significantly contributing to the nation’s development. It accounts for 12% of the total manufacturing output and 1.8% of GDP. In recent years, the sector has seen substantial growth in its order book and profit margins, thanks to significant expenditures by both the government and private sector.
A new report by leading research analyst Crisil Ratings expects the capital goods sector to maintain its growth momentum, predicting double-digit revenue growth in fiscal year 2025.
Let’s delve into the report and understand the factors driving this sustained growth.
What’s Happening?
Crisil Ratings published a report forecasting a 9-11% revenue growth for the capital goods sector in FY 2025. This growth is driven by the government’s substantial investments in railways (including metro rail), defence, highways, and renewable energy. Additionally, private players are investing heavily in new projects and expanding existing ones.
However, while the sector is expected to see strong revenue growth, it will be slightly lower than the 13% growth witnessed in FY 2024. This decrease is mainly due to sluggish export demand amid prevailing geopolitical conditions.
Key Highlights of the Report
In FY 2024, government spending on railways increased by 28%, while defence spending rose by 10%. Conventional sectors saw a 6-8% rise in capital expenditure, and investments in renewable energy capacity grew by 18%.
Aditya Jhaver, Director at Crisil Ratings, says, “Private sectors’ continued capital outlays in conventional sectors (6-8% on-year rise) supported by ramp-up in commissioning of renewable capacities (25-30% on-year rise) augur well for prospects of capital goods companies. Although investment towards railways and defence has moderated to ~5% on-year from the highs of ~20% seen last fiscal, development of metro infrastructure in multiple cities should see good traction. Net-net, we expect 9-11% overall revenue growth for capital goods companies this fiscal”.
Industries under the PLI scheme and emerging sectors like EVs and data centres have been pivotal for the capital goods industry. Investments in these areas accounted for 10% of the sector’s total output in FY 2024 and are projected to reach 25% by FY 2028.
The capital goods sector’s EBITDA margins have risen steadily from 2020 to the projected figures for 2025.
What’s in it for Investors?
It is an exciting time to invest in the capital goods sector. Major companies have shown impressive growth numbers and have a positive future outlook. The flagship BSE Capital Goods Index has risen by 77.59% in the past year (as of July 01, 2024), indicating tremendous potential in the sector.
Increased government allocation towards infrastructure in the upcoming budget will further boost capital goods companies in their quest for double-digit growth.
What’s Next?
While the long-term outlook for the capital goods industry remains positive, delayed execution of orders from end-user industries could slow momentum. Key players need to keep up with cutting-edge technological advancements in emerging sectors to ensure sustained growth.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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