July, 2015 Sector Outlook ENGINEERING AND CAPITAL GOODS OUTLOOK STABLE 1
Pace of implementation of announced capex likely to drive the performance of the capital goods sector As per the Central Statistical Organization, the growth in Gross Fixed Capital Formation (GFCF) inched higher in FY15 to 4.65%, from 2.95% in FY14, as per the new series data, indicating some traction in revival of the investment cycle. Further, as per the CMIE data, new capex announcements in the manufacturing sector touched Rs.2.4 lakh crore in FY15, which was, however, 6% lower than that in the previous fiscal year. But the conversion of the capex announcements into orders for the engineering & capital goods sector is likely to take more time than previously anticipated. This also needs to be looked in the light of the comfortable capacity utilization levels of the manufacturing sector (70-72% in 9MFY15 as per RBI capacity utilization survey), indicating enough spare capacity to meet uptick in demand, which has remained sluggish over the last few quarters. Even if the progress for the projects announced and taken up in the last few years hastens, it would take some time for the operating cycle to shorten, freeing up capital required for taking up new projects. While the government has been able to clear some backlog of the stalled projects through the Project Monitoring Group (PMG), around 404 projects worth Rs.19 lakh crore are awaiting clearances and have sought the PMG s help in this regard. The government has announced to step-up its own spending on infrastructure in counter-cyclical efforts to kick-start the investment cycle in the economy. Tying up funds and awarding of contracts to execute these orders is likely to take its own time, though the execution pace is expected to be faster. As a large part of the outlay is slated to build new physical infrastructure for sectors like roads, railways and ports, its effect on the engineering and capital goods sector would be only miniscule in the near-term, though its cascading effect on overall growth would likely be better for the sector. Opening up of FDI in sectors like railways and defence would spur investments in these sectors towards 2
building new capacities. Players focusing on exports to politically stable countries in Africa, South East Asia, Middle East and Latin America are likely to fare better and the recent currency depreciation is also likely to help boost competitiveness, though only marginally. 3
POWER EQUIPMENTS Outlook: Stable The Indian power equipment (IPE) industry is estimated to be worth Rs.1.40 lakh crore in FY15 (FY refers to the period April 1 to March 31). It registered a growth of around 9.95% in FY15 as against a moderate growth of 3.50% in FY14. Signs of revival were witnessed in the industry mainly due to pick-up in the power generation capacity in FY15, growth in T&D sector and marginal revival in manufacturing and investment cycle. As one of the proxy of growth in power equipment industry the Gross Fixed Capital Formation also grew by 4.65% in FY15 vis-à-vis 2.95% in FY14. Growth in output for various sub-segments of power equipment industry in FY15 was as follows: Product FY14 (% Growth) FY15 (% Growth) Comments on FY15 performance Rotating Machines (Motors) -6.9-1.0 De-growth in FY15 was witnessed mainly in the low tension (LT) motors, due to significant increase in imports Switchgears 4.4 6.7 Cables 9.1 32.3 Exhibited moderate growth with increase in demand from T&D sector Growth of cables is linked to growth of power and infrastructure segment. Both power cables and other cables witnessed growth of 24% and 51% in FY15, mainly led by pick-up in power generation capacity, momentum in T&D sector and marginal revival in investment cycle. Transformer s 4.3-2.9 Distribution transformers registered growth of 6% in FY15 due to increase in domestic demand and exports. However, power transformers registered de-growth of 15% in 245 kilo volt (KV) and higher KV class, despite a growth in exports. Issues related to availability of certain grades of cold rolled grain oriented steel also adversely impacted transformer 4
manufacturing Capacitors 41.1-10.0 De-growth was mainly due to lower domestic demand and high imports. Domestic capacities remained under-utilized with lower demand, aggressive competition and increase in raw material costs, resulting in lower profitability Energy Meters Transmission Lines (including conductors) 10.0 16.8-0.8-0.7 Exhibited good growth with increase in domestic demand from sectors such as power and infrastructure. Increased applications of energy meters in solar power distribution and modernization of domestic grid system through advanced metering infrastructure also resulted in growth in the segment The transmission towers segment registered degrowth of 12% in FY15, mainly due to majority of the order inflow in Q4FY15, which is likely to translate in higher production only in FY16. The conductors segment witnessed growth of 16% in FY15 due to higher demand mainly from public sector undertakings and state power utilities. The increase in demand was witnessed mainly in H2FY15. The major challenges that continue to beleaguer the power equipment industry are high imports and financial woes of state power utilities. During FY15, imports continued to be high at around 40% of the total domestic consumption and weak financial health of state power utilities continued to affect their ability to fully execute their capex plans and make timely payments, resulting in weak demand and elongated operating cycle for power equipment manufacturers. Going forward much would depend on revival of financial health of state power utilities, extent of imports and achievement of targeted power generation capacity addition. India has planned to add 278 GW of power generation capacity in the next seven years till FY22. If 70% of the planned capacity is materialised it would translate to an aggregate 5
annual order flow of around Rs.1.75 lakh crore for the Indian power equipment industry. In addition, there would also be a replacement demand of around 10% of the total orders. With expected revival in power sector and investment cycle and efforts to maximize power generation capacity addition in the last two years of the 12th plan period, the outlook for power equipment industry is likely to remain stable. Disclaimer This report is prepared by Credit Analysis & Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. 6