Capital goods production expands in June, led by capex revival

The Index of Industrial Production for June, released on Friday, showed capital goods output -- which is a barometer of investment -- rose by 26.1 per cent over the year-ago period, the sharpest among key categories within the index.

Unlike in May 2022 or June 2021, when capital goods output was led by a favourable base, the month under review saw no such base effect, sector experts said. Instead, the sharp rise in output, explain analysts at ICICI Bank Research, was due to a revival in capital expenditure (capex) by companies.

"Government capex activity is on track. This will usher private capex and demand," Sameer Narang, head, economic research group and Tanisha Ladha, research analyst at ICICI Bank Research, said.

Companies within the capital goods sector are already pointing to a comeback in private capex, which reflected in their order books for the April-June (Q1) period. This came despite Q1 being a seasonally weak quarter versus the January-March period for the capital goods industry.

For instance, sector leader Larsen & Toubro's (L&T) orders secured in the June quarter stood at Rs 41,805 crore, a 57 per cent jump over the previous year, led by diverse categories from metals to mining, transportation and hydrocarbons. Of this, domestic orders constituted 57 per cent and international orders made up 43 per cent.

Pune-based Thermax said its order inflow came from steel, power, refineries and chemicals. This helped it secure orders worth Rs 2,310 crore in Q1, a jump of 36 per cent over the previous year.

Siemens saw an uptick of 15 per cent over last year in orders secured during the June quarter to touch Rs 4,992 crore. KEC International said that a mix of transmission and distribution, cables, railways and oil & gas had helped it log strong order inflows in Q1. While ABB saw a 64 per cent growth in orders secured in the June quarter versus last year.

 "Proactive engagement across high growth market segments have reaped benefits even as uncertainties of inflation and a tight supply chain persist," said Sanjeev Sharma, managing director (MD), ABB India.

The company said that a combination of strong order backlogs, supported by ongoing demand would help the capital goods market in the future.

Vimal Kejirwal, MD and chief executive officer (CEO), KEC International, said that a diversified order book augured well for future growth. “It gives us confidence of delivering continued growth in the coming quarters,” he said.

While Sunil Mathur, MD and CEO, Siemens said that though performance across verticals was strong, concerns around global headwinds impacting demand remained.

The International Monetary Fund (IMF) had cut its global growth outlook in July to 3.2 per cent from 3.6 per cent forecast in April, saying that the world was on the brink of a recession.

India, on the other hand, would grow at 7.4 per cent in FY23, against 8.2 per cent forecast in April, the IMF said. It added that India would remain among the fastest-growing economies in the world. 

There are other challenges, too, for these companies, including an increase in the cost of capital. This is due to sustained interest rate hikes, though international commodity prices have come off their peaks.

The Reserve Bank of India last week raised the benchmark repo rate by 50 basis points to 5.4 per cent, its third hike in a row.

In a note, Sonal Varma, MD and chief economist at Nomura India, said there could be further rate hikes of around 60 basis points in the months ahead before a pause.

IIP growth for June 2022

Particulars	Jun-21	May-22	Jun-22
IIP	13.80%	19.60%	12.30%
#Capital goods	27.30%	54.40%	26.10%

June 2021 and May 2022 led by favourable base Capital goods constitutes 8.22% of Index of Industrial Production (IIP)

Source: National Statistical Office, MoSPI