As per CRISIL Ratings, Capital goods makers are likely to see revenue rise 9-11% in fiscal 2025, led by continued significant outlays towards railways (including metros), defence, conventional¹ and renewable sectors. This compares with an expected ~13% growth in fiscal 2024.
Operating margin could moderate 80-100 basis points to 12-13% in fiscal 2025 as the market scenario continues to be highly competitive and exports, which offer higher margins, remain sluggish, even as prices of raw material (mainly steel, copper, and aluminium) are stable.
That said, modest capital expenditure (capex) and continuing lower reliance on debt will support credit profiles.
A CRISIL Ratings analysis of 87 companies with an aggregate revenue of around Rs 3 lakh crore in fiscal 2024, constituting ~70%² of the capital goods sector, indicates as much.
In fiscal 2024, spending by the government on railways grew a strong 28% on-year, and on defence by 10%. Conventional sectors increased capex spend by 6-8% and investments in renewable capacity increased by a healthy 18%.
This continued momentum in capex is also evident from the order books³ of capital goods makers that has seen a strong growth of over 15% in fiscal 2024, translating into 2.5-3.0 times the revenue.
Aditya Jhaver, Director, CRISIL Ratings, said, “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(4) 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,” Jhaver added.
Revenue growth momentum for capital good players will also be supported by investments in PLI driven schemes as well as in emerging sectors like electric vehicles and data centres wherein growth opportunities could arise in terms of providing automation, digitalisation services, and setting up of charging networks.
These sectors (PLI driven schemes and emerging sectors) which accounted for ~10% of investments in fiscal 2024 is expected to rise to ~25% by fiscal 2028.
Joanne Gonsalves, Associate Director, CRISIL Ratings, adds, “Such increased business intensity would necessitate larger working capital requirements. Yet, the credit profile of capital goods manufacturers is likely to remain ‘stable’, as healthy accruals and moderate capital spends would support debt metrics.
“The debt to earnings before interest, tax, depreciation and amortisation and interest coverage ratios of CRISIL Rated capital goods companies are expected to average 0.90-1 time and 9-10 times, respectively, over the near to medium term,” Gonsalves said.
That said, any deferment in expected capex by end-user industries in a year could alter the growth trajectory of the industry. Also, ability of companies to cater to technological needs of the emerging sectors would be critical to sustain the growth expectations and would be monitorable.
1 Includes oil and gas, cement, automotives (including vehicles), steel product manufacturers
2 Basis industry classification by the Ministry of Heavy Industries
3 Represents 13 listed companies which have reported order book; these companies contributed ~27% revenue share of the sample analysed
4 As per interim budget announced in Feb’24
