By Deeksha JanianiIndustrial companies are not a much talked about sector - but there are signs that it came out of the shadows in FY23. The S&P BSE Industrials index has been steadily growing, despite ongoing economic setbacks since 2020. Its growth story gained momentum in early 2021, and the index has more than doubled since then.
Over the past year, it has ranked among the top five outperformers and surpassed benchmark returns in the past quarter.
What changed the game? Consecutive hikes in capex budgets made by the Centre to spur post-Covid growth has played a key role. The private sector also joined the party in 2022. Companies in the metals, cement and energy sectors unveiled fresh investment plans, sensing robust demand from the infrastructure space.
Fueled by this positive momentum, FY23 proved to be a landmark year for the capital goods sector and the electrical equipment industry. Notably, heavy electrical equipment is the largest sub-sector within capital goods, and will be our main focus area here.
Companies in this industry manufacture equipment ranging from motors, drives, turbines, generators, compressors, waste heat recovery plants, transformers, switchgears, boilers, and chillers. Most players in this industry saw record order inflows and a robust pace of execution in FY23. The cooling off in commodity prices was the icing on the cake.
But will this growth juggernaut continue to roll in FY24?
Electrical goods makers post an impressive performance in Q4FY23
Players clocked over 15% revenue growth in Q4 across the board, driven by a strong pace in order book execution. Triveni Turbine, a relatively smaller player, grew the fastest among the pack, led by robust momentum in its exports market and aftermarket sales.
Companies following the Indian fiscal year - CG Power, Thermax and Triveni - closed the financial year with robust top-line growth of more than 25%. Triveni, a manufacturer of steam turbines, outshined others on this count yet again.
Electrical goods manufacturers also saw their EBITDA margins improve YoY in Q4, led by lower input costs, operating efficiencies and better price realizations. CG Power stood out with a margin uptick of over 3.5 percentage points, the highest among its peers. This margin expansion enabled companies to register over 30% growth in their quarterly EBITDA.
Domestic growth takes the lead, exports business stays muted
Domestic markets have been the primary growth driver for equipment makers in both Q4 and FY23. Apart from Triveni, other players generated less than 25%-26% of their sales from exports, indicating a relatively small portion of their business.
Commenting on the company’s export segment, Ashish Bhandari, Managing Director at Thermax, said, “The overall export piece has been soft for some time. For whatever reason, even on the large projects, we have seen a bit of a slowdown.”
The subdued growth in exports may have a deeper reason beyond just a demand slowdown. For instance, consider India’s market share in global electrical machinery and electronics exports. It has stayed largely flat between 2011 and 2021. In contrast, Vietnam has won nearly 4% share and became the sixth largest exporter in just 10 years.
Interestingly, India has gained market share in segments like electrical gensets, electrical ignitions, steam turbines, and power transmission equipment. But overall progress has been limited, highlighting our poor competitiveness on the international stage.
Factors like slower customs clearance, higher import duties on components, lack of deep-sea ports, and products not meeting international standards are working against us.
Take the case of higher duties on parts used in mobile phones. According to a report from India Cellular and Electronics Association, the Centre increased duties on circuit boards, camera modules and connectors to 2.5% from 0% in the FY22 budget. Such a step increases the cost of production for companies and hampers their prospects in the export market.
Rail and metro projects propel order inflows for big players in Q4
In terms of order inflows, Siemens stole the show by winning a large multi-year contract of Rs 25,460 crore to make electric locomotives for the Indian Railways. Even after adjusting for this contract, Siemens’ orders grew by a commendable 8% in Q4FY23.
According to Roland Busch, President at Siemens AG, Siemens India will continue to bid aggressively for railway tenders in the near future. The company’s mobility division (which houses its rail business) has expanded rapidly in the past couple of quarters. Given the company’s goals, this segment does hold a lot of growth potential.
Another major player, ABB India, saw strong growth of over 35% in its Q4 order inflows. The orders were mostly for the short-cycle business, with strong contributions from ABB’s electrification and motion segments. Notably, order wins from railways and metro segments propelled the overall growth within the motion segment.
Among the top players, only Thermax saw a fall in Q4 order bookings due to a slowdown in the oil refining and petrochemicals sectors. However, the company anticipates a gradual recovery in the order pipeline for waste heat recovery and biomass projects.
Equipment makers upbeat about Centre’s infra push and rise of new-age sectors
Companies are optimistic about the demand prospects in India. Roland Busch, President at Siemens AG, sees India as the multinational’s fastest-growing market. Themes like de-carbonization, energy efficiency, and digitalization are emerging as key growth drivers.
Regarding the de-carbonization theme, Busch explained, “Going renewable means you have to invest in transmission and distribution grids, but you want to do it in a smart way so that they can manage the peak demand well. This is where Siemens is a market leader; we help in automating such grids.”
The management of ABB India sees the call for energy efficiency as a big growth driver. Sanjeev Sharma, Country Managing Director at ABB, in a recent earnings call, said, “New buildings and hotels which are coming up are demanding our building management system. The system allows you to reduce 25% to 35% of your energy footprint.”
Equipment makers foresee a good pipeline in new-age industries like data centres, logistics and electric vehicles. ABB offers robotic solutions for EV manufacturing and identifies this as a high-growth area. CG Power also aims to leverage this opportunity by doubling its motors capacity in the next 2-3 years with a special focus on EVs and exports.
Additionally, the Centre’s infrastructure push will drive demand in core industries like metals and cement. Thermax and Triveni Turbine expect healthy order inflows for waste heat recovery systems from the upcoming steel and cement capacities.
Railways also hold importance in the infrastructure plan, with many electrification and signaling projects underway. These projects can bolster the order books of Siemens, ABB and CG Power.
Robust growth to continue in FY24, but is it worth the price?
Given the encouraging demand trends, Analysts anticipate top electrical equipment manufacturers to achieve strong double-digit topline growth. They also expect a slight moderation in growth due to the high base of FY23.
Of the players with Indian promoters, Triveni may grow the fastest in FY24. For the Indian arms of foreign MNCs, Siemens may outpace ABB India. But the key concern lies in the high valuations of these stocks. The industry itself now trades at a whopping PE multiple of 70X, and none of the key stocks are in the buy zone currently. Investors should ideally wait for good entry points.
The heavy electrical industry is closely tied to the growth in domestic manufacturing and capital investments. As the current government accelerates spending in the last year of its term, this industry is set to continue its stellar run.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.
