The US$ 1 Trillion Sector of 2025: 4 Stocks to Watch Out for

India is on the cusp of structural shifts in the manufacturing sector.

Positive developments are creating a robust pipeline for the country's sustained economic growth in the years to come.

The government's initiatives like the National Manufacturing Policy aims to increase the share of manufacturing in GDP from 15% currently to 25% by 2025.

This translates into the manufacturing sector growing from about US$ 450 bn to over US$1 tn in the next five years.

Last week, in the first chapter of our trillion-dollar manufacturing sector series, we covered the chemicals industry.

In case you missed that article, you can read it here: The Trillion Dollar Sector of 2025: 5 Stocks to Watch Out For.

In this second article of our series, we are going the cover another important sub-sector and the stocks within it. It could be major contributor in the manufacturing sector growing to US$1 tn over the next 5 years.

Capital Goods

Capital Goods industry is often called the 'mother of all manufacturing industry.' It is the base of many industries and is an essential component of manufacturing.

Any good (i.e. plant, machinery, equipment) used to manufacture other products, directly or indirectly, is called a capital good.

Therefore, the performance of capital goods sector is inextricably linked to the overall manufacturing sector.

The total market size of the capital goods sector stood at US$92 bn in 2019. It has been estimated to reach US$ 115 bn by 2025.

The government's increased focus on infrastructure development in its recent budget reflects its commitment towards public spending.

This is expected to accelerate the growth of capital goods companies in the manufacturing space.

In the Union Budget 2022-23, the government has given a massive push to the infrastructure sector by allocating Rs 1,991.1 bn (US$ 26.52 bn).

The government expanded the 'National Infrastructure Pipeline (NIP)' to 9,318 projects worth US$ 2.23 tn. As of February 2022, there are 2,465 projects under development.

Unlike the previous cycle of capital goods which was driven by investments in core industries such as power, telecom, and oil and gas, the current cycle is likely to be driven by the infrastructure and manufacturing revival.

The Capital Goods industry contributes to about 2% of GDP. However, this is far lower compared with other countries such as China where the sector contributes 4.1% to its overall economy and 3.4% in Germany.

Clearly, India is less capital intensive than these nations and as the proportion increases will lead to exponential growth with an improved Incremental Capital Output Ratio (ICOR).

If we look back at 2012, the share of capital goods companies in the Sensex was over 7%. Currently, it's just 4%.

With a boost to the sector, there is huge potential for these stocks. For instance, between 2003-2008, sales for capital goods companies grew on average 7 times but the marketcap of leaders like ABB and Siemens grew an astonishing 18 times.

With this theme playing out, capital goods stocks might be worth adding to your watch list. They might see a sharp increase in their weightage in the Sensex.

This manufacturing push is unlike any other. For the first time, a lot of MNC's are transferring their technology to Indian counterparts. They are fully aware of the fact that India is on its way to become a manufacturing hub for the world.

Hence, it's not just domestic demand they foresee to drive the Indian economy. These MNC's as well as domestic companies are pushing ahead to make India an export hub for their international operations as they move away from China.

India's share in global merchandise trade stands at less than 2%. With all the focus on manufacturing, even if the share rose to 5%, the value creation for companies could be enormous.

Here are the top 4 companies from the capital goods sector to watch out for.

#1 Siemens Ltd

Siemens Limited is the flagship listed company of Siemens AG in India. Siemens AG is a German multinational conglomerate corporation and the largest industrial manufacturing company in Europe.

Siemens Ltd is a technology company focused on industry, infrastructure, digital transformation, transport as well as transmission and generation of electrical power.

The company has been present in India since 1867, when Werner von Siemens, the founder of the company personally supervised the setting up of the first telegraph line between Kolkata and London.

Today, Siemens has a significant manufacturing presence across the nation, numerous centres of competence and R&D facilities, a national sales and support network, and more.

All businesses of the company have performed exceedingly well over the last few years, with the order backlog at record levels.

With its wide-ranging portfolio, global technology leadership and strong local competence, Siemens is in a good position to partner with India in sustainable growth.

• "In a way, the 'Atmanirbhar Bharat' initiative is tailor-made for the Company, because it has all the verticals that support productivity in the manufacturing process. Be it Make in India, Digital India, Power for All, Smart Cities, etc. the Company's businesses are aligned to the Government of India's vision.
  
  As the public sector capital expenditure picks up, capital expenditure by the private sector will follow and these investments will be smart green infrastructure, electrification, decarbonization technologies, automation, and digitization. All these are areas of the Company's core competence."

This is an excerpt from the Chairman, Deepak Parekh's statement in the company's annual report 2021.

According to a recent article published in The Economic Times, Siemens AG has invested 1 billion Euros in India over the past five years and plans to invest further.

The company believes it has a huge role to play in India's rapid urbanisation and energy transformation.The company's order backlog from continuing operations stood at an all-time high at Rs 178.5 bn for the quarter ended 30 June 2022.

Revenue for June 2022 increased by 51% to Rs 38.6 bn, compared to the same quarter in the preceding year. Net profit was up 81% YoY to Rs 2.9 bn.

For the financial year ended September 2022, the company's revenue jumped up by 31.3% to Rs 129.6 bn against Rs 98.6 bn in September 2021. Net profit increased 45.8% for the same period to Rs 11.0 bn from Rs 7.6 bn.

The stock remained range bound in the first half of the year trading between Rs 2,200 and Rs 2,500 levels. Towards the end of June, the stock broke out from Rs 2,272 gaining over its 52-week high of Rs 3,107 in September.

Since then, the stock is off its highs and is currently trading at just above Rs 2,800 levels.

#2 ABB India Ltd

ABB India Ltd was established in India in 1949 as a subsidiary of the Swedish-Swiss ABB (Asea Brown Boveri).

The ABB group comprises about 1,000 companies, with about 105,000 employees has operations in 140 countries. It's involved in power generation, transmission and distribution, industrial equipment and systems, and factory automation.

ABB has been present in India for over a century and manufacturing for more than 70 years. The company has 25 plants across 5 locations in India.

Government initiatives like production linked incentives to encourage greater localisation as well as stimulus packages for greater job creating sectors are likely to continue.

The focus on infrastructure, transport, water and waste water, urban planning, and affordable housing are expected to benefit the company.

The company foresees demand coming in from electronics, data centres and warehouse logistics which are growing at over 15% on an annualised basis.

Other industries that should contribute to ABB India's growth would be renewables, beverages, water, pharma and auto as these segments are also growing in double digits.ABB India is focused on order wins and seamless execution across projects while modernising existing capacities and adopting digitalisation.

The stock which began the year trading at just above Rs 2,200 levels has had a stellar run on the bourses since June rising 55% to reach its yearly high of Rs 3,445 in September. The stock closed at Rs 3,133 on 21 October.

For the financial year ended 31 December 2021, ABB's revenue grew 19% to Rs 69.34 bn from Rs 58.21 bn in the year ending December 2020. However, net profit jumped 137% from Rs 2.192 to Rs 5.197 bn during the same period.

For the first 6 months of the current financial year, the company continued to excel with half yearly revenues already at Rs 40.20 bn and net profit at Rs 5.133 bn.

#3 Bharat Electronics Ltd

Bharat Electronics Ltd (BEL) is an Indian Government-owned aerospace and defence electronics company. It primarily manufactures advanced electronic products for ground and aerospace applications.

BEL, a PSU under the Ministry of Defence of India, has been granted Navratna status by the government of India.

The Government's emphasis on 'Make in India' and self-reliance in manufacturing provides great opportunity for import substitution and promoting innovative indigenous solutions for defence equipment.

BEL being a key player in defence with multiple existing competencies and strong R&D competencies is well-placed.

The company has been focused on progressing towards indigenous development of sub-systems, systems, and services for which capabilities and competencies are being built.

BEL has been investing in infrastructure creation and modernisation, skill development and outsourcing to Indian industries, especially MSMEs.

In financial year 2022, the company executed several challenging projects and won prestigious projects, including exports, strengthening its global positioning.

It received its largest export order worth US$ 93.15 m from Airbus Defence and Space for the manufacture and supply of Radar Warning Receiver (RWR) and Missile Approach Warning System (MAWS).

The company also received its largest avionics order worth Rs 24 bn from HAL for manufacture and supply of 20 types of critical airborne electronic systems for the LCA Tejas fighter aircraft program.

BEL is confident of maintaining margins around 20-22% going forward as it has a strong indigenous portfolio of products, which has reduced dependence on imports and other commodity prices.

The non-defence segment businesses like homeland security, smart cities, EVMs and other diversification areas will also contribute to the growth of the company. The future of the company looks promising.

FY 2021-22 saw the company achieving a turnover of Rs 153.138 bn against Rs 140.638 bn in FY 2020-21, a growth of 8.9%. Net profit increased 13.7% from Rs 20.654 bn to Rs 23.489 bn during the same period.

Over the years, the company has been on a strong growth trajectory with revenues and profits both consistently growing over the last 5 years.

The stock has outperformed the benchmark Sensex this year 54% as against a gain of just 0.2% on the Sensex since the beginning of the year.

Earlier, this year the company had issued bonus shares in the ratio of 2:1.

#4 Larsen & Toubro Ltd

No capital goods company list can be complete without Larsen & Toubro (L&T).

After all, L&T is generally regarded as the rough barometer of the state of the infrastructure sector in India.

With over 80 years of experience, L&T has unmatched capabilities across technology, engineering, construction, and manufacturing, and maintains a leadership in all its major lines of business.

Among the top companies in India, L&T's manufacturing footprint extends across eight countries in addition to India and it operates in over 50 countries worldwide.

A slew of incentive schemes launched by the Government should stimulate manufacturing to becoming a US$ 1 tn sector.

Leveraging its expertise in high tech manufacturing, L&T is well-positioned to take advantage of the opportunities as they unfold.

The Modi-led government is focused on a capex-driven infrastructure.

Most of the initiatives undertaken, ranging from NIP to NMP, creation of DFI, the PLI scheme, the public procurement initiatives as well as the renewed PPP models, have an overarching infrastructure focus.

As infrastructure investments serve the dual purpose of driving productivity and generating employment, L&T is poised to capitalise on these opportunities as they emerge.

The company with its detailed 5-year strategic Plan (Lakshya'26), has chalked out a path for future value creation for its stakeholders.

Lakshya'26 lays out a plan for pursuing profitable growth in its traditional businesses of EPC projects and manufacturing. The company will look to expand the size and scale of its IT&TS portfolio. L&T will incubate digital offerings in data centres, tech education and B2B e-commerce. It also has plans to invest in new areas of green energy. Aggressive plans are on to unlock value of its current investment in few non-core areas such as the concessions space.

For the financial year ended 31 March 2022, the company reported a 15% increase in its consolidated revenue to Rs 1,565.2 bn. Net profit jumped 23% to Rs 89.7 bn.

L&T is targeting group revenues of Rs 2,700 bn and ROE of 18%+ by FY 2025-26.

The consolidated order book of the group is at a record high of Rs 3,634.5 bn as of June 30, 2022, with international orders having a share of 28%.

The stock began the year on a positive note and made a yearly high of Rs 2,078 in January before moving sharply lower to touch a low of Rs 1,457 in June. Since then, the stock has been on an uptrend rising 29% to close at Rs 1,875 on 21 October.

With that we come to the end of our coverage of the second sub-sector which could potentially help the manufacturing sector reach the US$ 1 tn mark by 2025.

Hope you found this information useful. Stay tuned for the third part in our series to find out the next sub-sector and its stocks to watch out for.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...