Capex and incentives will lead capital goods sector surge by 9-11% in FY25: CRISIL Ratings

Capital goods companies are projected to achieve a revenue increase of 9-11 per cent in fiscal 2025, building on the anticipated 13 per cent growth in fiscal 2024, according to a recent analysis by CRISIL Ratings.

In an outlook for India's capital goods sector, leading manufacturers are poised for sustained double-digit revenue growth amidst robust government and private sector spending.

Key drivers of this growth include substantial investments across critical sectors such as railways (including metros), defence, and both conventional and renewable energy segments.

Government spending on railways surged by 28 per cent year-on-year in fiscal 2024, while defence saw a commendable 10 per cent increase. Concurrently, conventional sectors expanded their capital expenditure by 6-8 per cent, with renewable energy investments spiking by an impressive 18 per cent.

The robust capital expenditure is underscored by the capital goods industry's order books, which have grown by over 15 per cent in fiscal 2024, amounting to 2.5-3.0 times their revenue. This surge in orders reflects a buoyant market demand and underscores the sector's pivotal role in India's infrastructure development.

Aditya Jhaver, Director at CRISIL Ratings, highlighted the sector's resilience, stating, "Private sectors' continued capital outlays in conventional sectors (6-8 per cent on-year rise) supported by a ramp-up in the commissioning of renewable capacities (25-30 per cent on-year rise) augur well for the prospects of capital goods companies."

He added, "Although investment towards railways and defence has moderated to ~5 per cent on-year4 from the highs of ~20 per cent seen last fiscal, development of metro infrastructure in multiple cities should see good traction. Net-net, we expect 9-11 per cent overall revenue growth for capital goods companies this fiscal."

Moreover, the implementation of Production-Linked Incentive (PLI) schemes and emerging sectors like electric vehicles and data centers are expected to further drive growth.

These sectors, which constituted approximately 10 per cent of investments in fiscal 2024, are projected to rise to 25 per cent by fiscal 2028.

Joanne Gonsalves, Associate Director at CRISIL Ratings, emphasised the implications for capital goods manufacturers, noting, "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."

He added, "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."

While the outlook remains positive, potential delays in capital expenditures by end-user industries and the industry's ability to meet evolving technological demands in emerging sectors pose monitorable risks.