The capital goods sector is facing severe pressures following the Union Budget 2025-26 announcements, leading to steep declines among major companies including Siemens, Hitachi Energy India, and Thermax.
On February 1, 2025, when the budget was presented, the government's capital expenditure (capex) outlay was largely maintained at ₹11.2 lakh crore (approximately $135 billion), just slightly more than the previous year. Analysts had anticipated a more aggressive spending plan, with expected figures ranging from ₹13-14 trillion. This underwhelming announcement has sent shockwaves through the stock market, particularly impacting companies tied to infrastructure, defense, and railway projects.
Siemens shares dropped about 7%, now trading at ₹5,503.7. Other significant losers included Hitachi Energy and Thermax, both showing declines of around 9%. The BSE Capital Goods index itself suffered considerably, reflecting these downturns as it fell over 4%. This downward trend marks 7.5% loss for the capital goods index within just two trading days post-announcement.
Motilal Oswal, noted for its brokerage insights, indicated frustrations around the slower expected capex growth, projecting rates of just 7.3% for FY25RE and 10% for FY26BE. They advised investors to be selective, focusing on companies less affected by the diminishing government spending. Specifically, Motilal has downgraded major players like Hitachi Energy and Thermax to 'sell' positions, adjusting the price targets significantly—Hitachi Energy now stands at ₹10,500, down from ₹13,300, and Thermax to ₹3,500 from ₹4,400.
Analyst reports highlight concerns about broader industrial challenges, emphasizing the key role of government investment. The capex allocation for FY26 increased marginally by 0.8% from ₹11.11 trillion, well behind what many analysts expected. The majority of sectors related to defense, railways, and roads remained stable, facing increases of just 13% and flat growth rates compared to previous estimates. Surprisingly, burgeoning sectors like fisheries and ports garnered disproportionate increases, indicating shifting government priorities away from traditional capex-centric industries.
Interestingly, defense investment saw sharper boosts, increasing significantly to ₹6.8 trillion, which included allocations for modernizing military-grade equipment. Prominent concerns expressed by industry analysts include the lack of solid growth levers projected for the year, with expectations of lower nominal GDP growth around 10% reflected by budget allocations.
While lower private capital expenditures have been noted across related markets, Sunil Damania, Chief Investment Officer at MojoPMS, expressed belief the Finance Ministry fails to prioritize capital expenditure effectively. He noted, “If we analyze the total capex—which includes central government spending, grants provided to state governments, and investments by central public sector enterprises—it is projected to reach ₹20 trillion by FY2026, which is supportive of growth.”
Despite the declines, some analysts remain optimistic about the potential for recovery. The firm JM Financial insists on the substantial nature of the capex allocations relative to the size of India's economy, which nears ₹350 trillion. According to their analysis, such levels of capex are significant for sustainable growth.
Market dynamics may still shift, as many analysts now suggest focusing investments on companies committed to sectors with high growth potential, such as power transmission and distribution, renewables, and defense advancements. Samir Arora from Helios Capital remarked on the expected deratings within capital goods, noting the need for correction of sky-high multiples often associated with consumer sectors. He was quoted saying, “Of course it will derate… those companies don't deserve 40 and 50 multiples.”
With the capex environment remaining unclear post-budget, investors are urged to analyze company fundamentals carefully. The sensitivity to government spending will likely shape future investment decisions, making selectivity within the capital goods sector even more pressing.
Overall, the responses from the capital goods sector post-budget reflect broader concerns about growth and investment strategies moving forward, highlighting the delicate balance needed to stimulate significant gains amid shifting governmental priorities.