Reports suggesting that Chinese companies might be allowed to bid for Indian government projects have created uncertainty in the infrastructure and capital goods sectors. While the government has not officially confirmed any policy changes, the speculation has brought several stocks into focus as potential winners and losers.

Background of Chinese Restrictions

In 2020, the Indian government implemented restrictions on Chinese firms participating in government contracts due to security considerations. These measures resulted in Chinese companies being banned from contracts worth approximately $700.00-750.00 billion. The impact was significant, with the value of new projects awarded to Chinese entities falling by 27.00% to $1.67 billion in 2021.

A notable example includes CRRC (China Railway Rolling Stock Corporation), the world's largest manufacturer of railway transit equipment, which was disqualified from bidding for a $216.00 million train-manufacturing contract. The restrictions also delayed India's plans to increase thermal power capacity to approximately 307.00 GW over the next decade.

Companies at Risk

According to analysts, several major infrastructure and capital goods companies could face significant challenges if Chinese firms are allowed to re-enter the bidding process. Jefferies has identified companies deeply tied to government projects as most vulnerable to competitive pricing pressure from Chinese rivals.

High-Risk Companies

Analysts note that capital goods stocks are already under pressure due to slow earnings, and the potential return of Chinese competition could further impact their performance. However, the defence and power sectors are considered relatively safer due to their sensitive nature.

Potential Beneficiaries

While some companies face challenges, state-owned asset owners could benefit from increased competition. When more bidders participate, project costs typically decrease and execution speeds up through competitive bidding processes.

Companies That May Benefit

• Power Grid Corporation of India: Could benefit from lower project costs
• NTPC: May see faster project execution and reduced costs
• Hitachi Energy: Potential opportunities in competitive environment
• Siemens Energy: May benefit from market dynamics

Market Implications

The potential policy change presents both challenges and opportunities. Increased competition could lead to margin pressure for Indian companies but might result in faster project implementation and cost reduction for project owners. Some brokerages suggest that even if restrictions are relaxed, the government may implement safeguards rather than completely opening the market.

Analysts emphasize that quarterly earnings and execution capabilities will remain more significant factors than policy speculation when assessing medium to long-term outlooks for capital goods and infrastructure companies.

Current Status

No official confirmation has been provided by the government regarding any policy changes. The restrictions implemented in 2020 remain in place, and the recent reports remain unverified. Market participants are advised to focus on company fundamentals and quarterly performance rather than speculation until official policy clarification is provided.

Recent media reports suggesting the Indian government may ease restrictions on Chinese companies participating in public sector contracts have drawn significant attention from brokerages, with analysts identifying varying impacts across industrial segments.

Brokerage Analysis Overview

According to Jefferies, the government could relax curbs imposed in 2020 that restrict Chinese firms from participating in government tenders. The brokerage emphasizes that the impact will vary sharply by segment, with some companies facing minimal effects while others could see substantial changes to their competitive landscape.

Bernstein echoes similar views, noting it would be surprised if the government completely removes Rule 144 without safeguards. Industry checks suggest some form of relaxation is likely, potentially implemented on a segment-specific basis or with additional compliance requirements for Chinese firms.

Companies Expected to Face Limited Impact

Several sectors are anticipated to see minimal effects from any policy relaxation:

Jefferies specifically highlighted that defence-related companies are likely to see the least impact from any relaxation, while power transmission companies benefit from national security priorities surrounding the transmission grid.

High-Impact Companies and Sectors

Engineering and construction companies face the most significant potential effects:

Heavy Engineering & Construction:

• Larsen & Toubro: Expected to face highest impact if Chinese bidders return to large infrastructure projects
• Afcons Infrastructure: Significant exposure to infrastructure project competition
• Bharat Heavy Electricals: High impact anticipated from increased competition

Equipment Manufacturers:

• ABB: Expected to be affected, though to a lesser extent
• CG Power: Moderate impact anticipated

Bernstein believes equipment manufacturers, particularly multinational players, are likely to be more impacted than construction companies. For Larsen & Toubro specifically, the brokerage expects the impact to be negative but only marginal.

Potential Policy Implementation

The push for easing restrictions may not originate solely from the Ministry of Power. Bernstein indicates that other ministries, including steel, are also advocating for changes. Any relaxation could be implemented through:

• Segment-specific basis implementation
• Additional compliance requirements for Chinese firms
• Gradual removal of restrictions with safeguards

Clear Beneficiaries Identified

State-owned asset owners emerge as potential winners from increased competition:

Both Power Grid and NTPC could benefit from increased competition helping expedite project execution and reduce costs, particularly beneficial for competitively bid projects. The enhanced competition could create operational efficiencies and cost advantages for these state-owned enterprises.

Market Implications

The potential policy shift represents a significant development for India's industrial landscape, with brokerages highlighting the nuanced impact across different sectors. While some companies may face increased competitive pressure, others could benefit from improved project economics and faster execution timelines.