Capital goods stocks experienced significant pressure for the third consecutive trading session on January 12, as market participants reacted to reports suggesting the government may allow Chinese companies to participate in bidding for government contracts across infrastructure, power, and manufacturing sectors.

Stock Performance and Market Impact

Major capital goods companies witnessed substantial declines during the trading session:

Hitachi Energy India was particularly affected, with the stock declining 14% over the three-day period. A partial recovery was observed later in the trading session following comments from US Ambassador to India Sergio Gor, which triggered broader market recovery.

Policy Background and Concerns

The market reaction stemmed from Reuters reports indicating the Centre is considering rolling back 2020 procurement restrictions that previously limited Chinese companies from bidding for government contracts. This potential policy shift follows easing diplomatic and border tensions with China. The proposed changes aim to revive competition, reduce project costs, and accelerate execution of public and private projects, particularly in infrastructure, power, and manufacturing sectors.

Brokerage Analysis: Limited Impact Expected

Despite market concerns, leading domestic brokerages have provided reassuring assessments regarding the potential impact on Indian capital goods companies.

Systematix Perspective

Systematix highlighted several factors that could limit the impact on domestic players:

• Localization Focus: The government's aggressive push for localization in power equipment over recent years
• Capacity Investments: Substantial capital expenditure announcements from power generation and transmission equipment players
• Strategic Considerations: The strategic importance of power grids to national security

The brokerage expects limited impact on transformer, switchgear, substation and grid automation businesses, including companies like GE Vernova T&D, Siemens Energy, Hitachi Energy, TARIL and CG Power.

Sector-Specific Impact Assessment

Strategic Infrastructure Considerations

Systematix emphasized the critical nature of power grid infrastructure, noting that power grids represent strategically important national assets and high-value targets. The increasing digitization and automation of grid systems, including sensitive areas like grid automation systems and SCADA/EMS platforms, reinforces the strategic importance of maintaining domestic control.

The brokerage noted that TBEA, the globally third-largest Chinese player, has a capacity of 200 GVA, representing less than 5% of India's transformer industry capacity.

PL Capital Assessment

PL Capital provided additional perspective on potential competitive dynamics, suggesting that while BHEL and L&T could face incremental competitive pressure in the BTG (Boiler, Turbine, and Generator) segment, Chinese participation is likely to remain limited due to strategic sensitivity and control risks associated with critical infrastructure projects.

The brokerage expects that even if Chinese players are permitted to participate, the government would likely mandate local manufacturing requirements. Recent CEA notifications to localize 16 critical components, including switchgear, insulators, and voltage transformers, are expected to support the domestic transmission and distribution cycle while reducing import dependence.

The current market reaction reflects investor concerns about increased competition, though brokerage analysis suggests the impact on established Indian capital goods manufacturers may be more limited than initial market fears indicate, particularly given ongoing localization initiatives and strategic infrastructure considerations.

Capital goods stocks continued their downward spiral for the third consecutive trading session on Monday, January 12, with major industry players witnessing sharp declines of up to 6.5%. The sustained sell-off has been attributed to reports suggesting potential policy changes regarding Chinese participation in Indian government contracts.

Market Performance and Key Decliners

The following table shows the performance of major capital goods stocks during the trading session:

Other affected stocks included Thermax, Inox Wind, Zen Technologies, and Siemens Energy India, all declining within the 2-4% range. The BSE Capital Goods index reflected the sector-wide pressure, tanking 2.4% to reach the day's low of 64,003 points, though it recovered partially to trade 1.20% lower by 2:45 PM.

Policy Background and Trigger Events

The current market turbulence stems from Reuters reports indicating that India's Finance Ministry is considering lifting five-year-old restrictions on Chinese companies bidding for government contracts. The potential policy shift involves contracts worth $700-750 billion and aims to revive commercial ties amid easing diplomatic tensions.

The existing restrictions were implemented through multiple policy measures:

• Atmanirbhar Bharat Package (May 2020): Amendment to General Financial Rules disallowing global tenders up to ₹200 crore in government procurement
• Rule 144 (July 2020): Restrictions on bidders from countries sharing land borders with India on national security grounds

According to the Reuters report, officials are working to remove the registration requirement, with sources indicating that Prime Minister Narendra Modi's office will make the final decision on the matter.

Industry Impact Assessment

Domestic brokerage firm Systematix Institutional Equities has provided analysis on the potential impact across different business segments:

The brokerage noted that BHEL, despite having the greatest overlap with Chinese Original Equipment Manufacturers (OEMs) in terms of product offerings, maintains an order book providing visibility of over seven years. This extended order book shifts focus toward execution and margin realisation of existing orders rather than new contract acquisition concerns.

For L&T, the analysis suggests limited impact given the company's existing competition with Chinese players in Middle East markets and significant exposure to services-led businesses, which may provide some insulation from the policy changes.

Market Outlook

The three-day decline in capital goods stocks reflects investor concerns about increased competition from Chinese manufacturers in the Indian government contracting space. However, the brokerage assessment suggests that established Indian players may have sufficient order book cushions and diversified business models to weather potential policy changes.

The sector's performance in coming sessions will likely depend on official clarification regarding the scope and timeline of any policy modifications, as well as the specific segments and contract values that may be affected by the potential easing of restrictions.