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.

Capital goods stocks faced significant selling pressure on Monday, January 12, with major companies including BHEL, ABB India, CG Power, and others declining between 1% to 6%. The weakness extended losses from the previous week as concerns mounted over reports suggesting Chinese companies may be allowed to bid for government contracts in the transmission sector.

Market Performance and Stock Movements

The capital goods sector witnessed broad-based selling across key players. The following table shows the performance of major stocks:

Within the high voltage and extra high voltage space, stocks like Hitachi Energy, GE Vernova T&D, CG Power, and Transformers and Rectifiers emerged as some of the most active names during the trading session.

Industry Expert Analysis

According to Renu Baid Pugalia of IIFL, industry interactions indicate that within the transmission space, power transmission, and high voltage reactor category, Chinese manufacturer TBEA has reportedly been approved to participate in bids for reactors starting from financial year 2027. However, she clarified that restrictions have not been completely lifted, suggesting no immediate risk of imports.

"It's not that the restrictions are lifted. So there is no risk of imports here at the moment. But yes, in the transmission space, where players were constrained on capacities and the average pricing in the market have shot very sharply. There we are hearing Chinese players, or they are factories which are based out in India are now being allowed to participate in future bids," Pugalia explained during an interaction with CNBC-TV18.

Market Outlook and Valuation Impact

IIFL's analysis suggests that valuations are expected to correct for capital goods companies as the market factors in increased competition and associated risks. However, the impact on earnings may be limited due to existing capacity constraints in the sector.

Pugalia noted that market prices were expected to correct regardless of TBEA's entry, but the announcement of Chinese-owned manufacturers being re-allowed in the market will create a sentiment overhang. "We don't perceive or foresee any material impact on earnings or sudden crackdown on the market pricing, because capacities are constrained," she added.

Government Position

It is important to note that no official notification from the government has been issued regarding the allowance of Chinese companies to bid for government contracts. The market reaction appears to be based on industry reports and expert interactions rather than confirmed policy changes.