Reports are indicating that the business cycle for the capital goods sector is in the best shape in a very long time. What is your own observation? Is the tide really turning?
I do not think we should use words like dramatic turnaround. It is the beginning of green shoots for the capital goods industry. It is positive news but I do not think we should over dramatise it. Across-the-board, data is coming in that capacity utilisations are inching to 80-85% and that board rooms of companies are looking at discussing expansion plans.
Some have already gone for expansion plans and there is derived demand for capital goods across the board but specifically in the infrastructure sector. It is boom time for construction, industry and allied industries. It would be more dramatic for the construction sector than for the general capital goods industry. If you see the demand and production for steel, cement, and construction equipment, the order books of EPC companies corroborate the fact that construction is largely driven by highways and railways.
Both track expansion and electrification and metro rail are the segments that are pushing this move and there has been a pickup in retail housing, though not so much the large condominiums by big builders. There has been a spate of growth in tier II and tier III cities where people building their old houses and flats. So, there is pickup in individual retail housing. All of these things are adding up. There is a feel-good factor there compared to what we have seen in previous years and we all look forward to that.
What about margins and profitability? Is it going to take some time to come?
That is very clear. Margins have obviously got eroded in the down cycle. We are looking at the upcycle. The market will readjust and capital goods will see their margins moving up compared to the down cycle.
Is there enough scope and scale for all of the players to garner more of the order flow that is coming through or it is going to be very competitive?
That is a very generic question but let me craft my reply with specific reference to project exports. Due to a weaking rupee, the export markets are getting increasingly attractive. There is a burgeoning order book from Africa. Indian project exports and related capex with it from the African continent, largely sub-Saharan Africa and the Gulf area and from south and south east Asia including Indonesia.
We are finding that many countries like China, Japan and Korea are providing a huge degree of bundling or cheap state finance through their EXIM banks or organisations like JICA, etc. It is putting Indian project in a disadvantage. The capital base of Indias EXIM bank is pretty low compared to the size of the EXIM financing outfits of these countries.
We capitalised on the IT boom in the 90s. India should work out a far more aggressive strategy supporting and pushing exports with state support, bundling long-term cheap finance through EXIM bank in a bigger way than we have been doing in the past. The project exports market could be the next big thing to happen to India after IT exports.