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Capital Goods

With a total market size of US$ 92 billion and production valued at US$ 32 billion,
Capital Goods sector today, contributes to 12% of India's manufacturing output.
On the export front, India's share in global exports from the sector is currently
very low, ranging between 0.1% - 0.6% across various sub-sectors. In contrast, in
countries like China, Germany, Japan, Korea this range is between 7% - 16%
depending on the sub-sector.
According to data from World Bank value added manufacturing is 17% of Indias
GDP. See References for further details.
Capital goods can be divided into nine broad sub-sectors: Machine tools, Process
plant machinery, Heavy electrical machinery, Textile machinery, dies(dies,
moulds and tools); Earth Moving equipment, Metallurgical machinery, plastic
processing machinery and engineered goods.
India has been moving from a stage of exporting low value goods to developing
countries to a stage of exporting high value goods to developed countries. 60%
of Indias total engineering exports now go to US & Europe.
Indian engineering exports grew at CAGR of ~11% to US$ 56.7 bn in FY13 from
US$ 33.7 bn in FY08

Capital Goods sector reveals that its fortunes are inextricably linked with that of
the overall Indian industry. High degree of correlation between the performances
of the two sectors is further accentuated by high elasticity of Capital Goods
industry to changes in industry growth
Machine Tools: Mother sector of the industry 800 manufacturers largely SMEs;

Revival will be triggered by - i) Sustained recovery in consumption demand


leading to increased capacity utilization and ii) investment push by public sector
leading to a virtuous cycle of cash flow generation in the system

Revenues of global industrial players suggests that the sluggishness has


continued for ~8 quarters now Middle east. Sharp depreciation of EUR that has
improved the competitiveness of European players in the traditional markets of
SE Asia and Africa along with Rupee appreciation
Manufacturing IIP remains sluggish and is down 0.8% in 3QFY15 (3mma), while
capacity utilization (as monitored by RBI) has declined to 71% in 2QFY15 (from
peak levels of 79% in 2QFY10)

Drivers
Make in India: Development of industrial clusters, simplification of
documentation processes and regulatory requirement with focus on import
substitution as well as increased exports
Example: Auto-components are being sourced in India from Indian companies
like Amtek Auto, Motherson Sumi and Force Motors. The automobile majors like
Mercedes Benz and BMW assemble in India while sourcing some components
from these Indian auto-components manufacturers and save on import duty as
well as expensive auto parts. This reduces the cost of luxury automobiles and
makes them more competitive in the market.
Digital India is set to massively boost the electronics hardware sector. Some
prominent investments include
Reliance Industries will invest over Rs 2.5 lakh crore, including in rollout of its
wireless broadband infrastructure and manufacturing of mobile handsets
KM Birla would invest $9 billion over the next five years in network rollout and
infrastructure, and towards other digital projects
Bharti group was committed to investing Rs 1 lakh crore over the next five years
in building digital infrastructure
LCD panel fabrication unit by Sterlite for 40,000 crore
Other drivers
The Indian mandated that Central PSUs, Central government
ministries/departments must procure 20% of products and services from Micro &
Small Enterprises (MSEs) thus boosting the small enterprise manufacturing in
India.
Also, harmonization of tax structure in the form of GST will reduce bureaucracy
and inefficiencies.
The effect of 49% FDI in defence can be gauged in form of JVs between Indian
and foreign companies e.g. Mahindra Defence and Airbus Helicopters JV. This will
boost defence manufacturing in India as 40% of defence budget is spent on
capital acquisitions
100% FDI in medical devices

Investment in railway infrastructure is a key priority for the Railways Ministry.


This will benefit Indian companies like Texmaco, Titagarh Wagons and Fedders
Lloyd
Electrical machinery: During the last 8 years, exports have increased at a CAGR
of 14.8% to touch USD 4.9 Billion in 2013-14. The industry is wholly de-licensed
with 100% FDI. The government has a planned capacity addition of 88.5 GW
projected at the end of 2017 through the Accelerated Power Development
Reform Program.
Power Plant Equipment: As India grows in manufacturing prowess and
development, it needs to fulfil the growing power requirement in the country.
This will help power plant equipment manufacturers like L&T MHPS Boilers Pvt
Ltd, a JV between L&T and Mitsubishi Hitachi Power Systems which makes
boilers, turbines and generators for power projects
Weaknesses
Bridging the technological gap
Concrete implementation of policy initiatives in land acquisition as well as efforts
underway to i) unlock mining activity, ii) widen the space for foreign direct
investment in defence, insurance and railways, iii) expediting project approvals
and iv) supportive monetary conditions
Export performance has been hamstrung by a multitude of factors, including: i)
weak global demand, ii) geopolitical tensions and iii) sharp currency volatility in
several markets

Recommendation: Astra Microwave (Rank 1 in Business Todays Fastest-Growing


Emerging Companies segment with revenues of 500-1000 crore)

References
http://data.worldbank.org/indicator/NV.IND.MANF.ZS
Manufacturing refers to industries belonging to ISIC divisions 15-37. Value added
is the net output of a sector after adding up all outputs and subtracting
intermediate inputs. It is calculated without making deductions for depreciation
of fabricated assets or depletion and degradation of natural resources. The origin
of value added is determined by the International Standard Industrial
Classification (ISIC), revision 3. Note: For VAB countries, gross value added at
factor cost is used as the denominator.
http://www.business-standard.com/article/news-cm/national-capital-goods-policyon-the-anvil-public-consultation-underway-115051900381_1.html
http://www.dnaindia.com/money/report-suresh-prabhu-to-unveil-his-vision-forrailways-in-white-paper-2048251
http://www.business-standard.com/article/current-affairs/govt-s-digital-india-callgets-rs-4-5-lakh-cr-promise-115070200064_1.html
http://businesstoday.intoday.in/story/emerging-companies-2015-astramicrowave-b-malla-reddy-plans-ahead/1/221084.html
http://economictimes.indiatimes.com/news/defence/push-for-make-in-indiaairbus-mahindra-to-jointly-manufacture-militaryhelicopters/articleshow/47923573.cms
http://timesofindia.indiatimes.com/india/Hike-in-defence-FDI-cap-fails-to-lureinvestors/articleshow/46522466.cms
http://www.pharmabiz.com/NewsDetails.aspx?aid=85648&sid=1

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