Whalesbook
Nuvama Wealth Management highlights the engineering and capital goods sector as a beneficiary of India's Rs 7.93 trillion power transmission infrastructure push. While analysts are optimistic about growth for companies like CG Power and Thermax, they warn of high valuations and slower private investment execution.
What Happened
Nuvama Wealth Management recently released a research report on India’s engineering and capital goods sector. The brokerage shared a positive outlook, highlighting the sector's potential to grow alongside India's infrastructure and manufacturing expansion. Within this space, the analysts identified CG Power and Thermax as preferred names. The report points to the power transmission and distribution (T&D) industry as a primary growth driver, with projections of over Rs 7.93 trillion in capital spending by FY36 to support India's renewable energy goals.
The Rs 7.93 Trillion Transmission Story
India is targeting a significant increase in non-fossil fuel energy capacity, aiming for roughly 900 gigawatts by FY36. This transition requires a robust power grid capable of moving electricity from renewable energy sites to where it is consumed. Consequently, massive spending is expected in the transmission sector. This development benefits companies that manufacture high-end equipment like transformers, High Voltage Direct Current (HVDC) systems, and Gas Insulated Switchgear (GIS). These are essential parts of modern power grids.
Why Nuvama Likes CG Power and Thermax
The brokerage views CG Power and Thermax as having distinct growth stories. For CG Power, the report notes several expansion areas including its work in Gas Insulated Switchgear, its entry into semiconductor manufacturing, and its involvement in railway projects. For Thermax, the interest centers on improving business visibility. The company is phasing out older, lower-profit legacy projects and focusing on a mix of business that includes growing export orders, which the brokerage views as a positive step for margins.
The Valuation and Execution Reality
While the growth outlook for the transmission sector is strong, the report adds a layer of caution for investors regarding company valuations. Analysts noted that stock prices for several firms in the high-voltage T&D segment have risen significantly, potentially limiting further upside from current levels. Furthermore, the broader engineering sector faces a mix of challenges. While order inquiries are healthy across industries like data centers, metals, and oil and gas, actual execution has been slower than expected. Specifically, while new orders for private capital projects have grown by 36% year-on-year, the pace of project completion has lagged, showing only about 10% growth.
Sector Pressures and Risks
Investors should be aware of pressures impacting the wider industrial engineering sector. Companies are currently navigating challenges related to commodity price inflation and higher freight costs, which can impact profit margins. Additionally, while firms have seen margins expand to around 20% due to strong demand for T&D equipment, sustaining these levels will depend on managing these cost pressures effectively. In the defense sector, which is also part of this broader space, the performance has been mixed, with some companies facing supply chain constraints that lead to delivery delays.
What Investors Should Track
As the engineering sector continues to evolve, investors may want to monitor a few key factors. First, watch the actual execution of projects rather than just the order book. An order book is useful, but profitability only arrives when the project is finished and delivered. Second, keep an eye on how these companies manage input costs, such as raw materials and logistics. Third, compare company valuations with their long-term growth potential to see if the current price is justified. Finally, look for management commentary on private capital expenditure recovery, as this will indicate whether the demand is translating into actual work on the ground.