Private Capex Gains Ground as Capital Goods Firms’ Order Books Grow: ICRA

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Growing order books at capital goods companies point to private capital spending pulling in the fiscal year ending March 2023, according to ICRA Ltd.

Government investments in infrastructure creation, coupled with policies to achieve self-sufficiency in manufacturing (through production-linked incentives), technical skills building and carbon neutrality, boost growth in the capital goods sector, the rating agency said in a report.

“That aside, a healthy demand outlook across multiple end-user segments, supported by a recovery in consumer demand, is driving investment traction,” he said. “Some of the key industries showing healthy investments include energy (power generation, mostly renewable and storage, transmission, oil and gas, green hydrogen), digitalization (including data centers), basic industries ( cement, metals) and business sectors (automotive/mobility, pharma, chemicals, textiles, among others).

India’s infrastructure push is evident in the increase in government capital expenditure in the Union budget for 2022-23. The country has also announced the National Infrastructure Pipeline comprising projects worth Rs 102 lakh crore. It has allocated Rs 2.75 lakh-crore under the PLI scheme.

CIFAR studied two sample groups of capital goods companies: original equipment manufacturers and engineering and procurement companies with captive manufacturing of engineered/fabricated products. “Revived capital expenditures in various end-user industries led to strong orders in the prior fiscal year, which in turn allowed the backlog to increase to the highest levels in the past six years, providing good revenue visibility.”

“While order books have widened significantly in recent quarters, driven by public and private sector capital spending across several sectors, uncertainties arising from factors such as supply chain, geopolitics and any restrictions due to the resurgence of Covid-19 could hamper future order fulfillment or influx of demand,” said Sabyasachi Majumdar, Senior Vice President and Group Head at ICRA.

The sector, he said, has been affected by a sharp increase in commodity prices, particularly crude oil, fossil fuels, metals as well as logistics costs (especially on exports) – including a significant relief is unlikely in the short term.

“This could negatively impact the operating margin of capital goods companies given that the majority of contracts are fixed price in nature, limiting the ability to pass on price increases to customers, despite expectations. revenue growth.”

Still, ICRA expects the majority companies in its sample to report “healthy revenue growth in FY22 as well as FY23.”

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