Capital Goods Sector Playbook
This playbook covers the Capital Goods sector of the Indian stock market. Use it to understand how companies in this sector make money, what metrics matter m...
Sector Overview
This playbook covers the Capital Goods sector of the Indian stock market. Use it to understand how companies in this sector make money, what metrics matter most, and how to value them.
What you will learn
- Business Model: Project-based vs product-based models, government capex dependency
- Order Book Analysis: Book-to-bill ratio, order inflow trends, execution timelines
- Working Capital: Cash conversion cycles, retention money, milestone billing
- Government Policy Impact: PLI schemes, infrastructure push, Make in India defence orders
- Valuation: EV/EBITDA, order book multiples, and cyclicality-adjusted metrics
Sub-industries in this sector
| Basic Industry | Playbook |
|---|---|
| Abrasives & Bearings | View playbook |
| Aerospace & Defense | View playbook |
| Aluminium, Copper & Zinc Products | View playbook |
| Cables - Electricals | View playbook |
| Castings & Forgings | View playbook |
| Commercial Vehicles | View playbook |
| Compressors, Pumps & Diesel Engines | View playbook |
| Construction Vehicles | View playbook |
| Dealers-Commercial Vehicles, Tractors, Construction Vehicles | View playbook |
| Electrodes & Refractories | View playbook |
| Glass - Industrial | View playbook |
| Heavy Electrical Equipment | View playbook |
| Industrial Products | View playbook |
| Iron & Steel Products | View playbook |
| Other Electrical Equipment | View playbook |
| Other Industrial Products | View playbook |
| Packaging | View playbook |
| Plastic Products - Industrial | View playbook |
| Railway Wagons | View playbook |
| Rubber | View playbook |
| Ship Building & Allied Services | View playbook |
| Tractors | View playbook |
How to use this playbook
Start with the Business Model lesson to understand how companies in this sector generate revenue. Then move through metrics, risks, and valuation in sequence. Each lesson builds on the previous one.
1. Capital Goods — Business Model
What you will learn
- The capital goods sector structure: project-based vs product-based models
- Sub-sectors: BTG (boiler-turbine-generator), T&D, industrial, defence, railways
- Revenue recognition: percentage-of-completion vs delivery-based
- The government capex dependency and its cyclicality
- How to identify competitive moats in a largely commoditized sector
Sector structure — what are "capital goods"?
Capital goods companies manufacture equipment and execute projects for other industries. They're the "picks and shovels" of India's infrastructure and industrial build-out.
Two business models — fundamentally different economics
| Parameter | Project-Based (EPC) | Product-Based (OEM) |
|---|---|---|
| Revenue recognition | % completion (over years) | On delivery (spot) |
| Order book | Large (2-4x revenue) | Small (made-to-stock or short lead) |
| Working capital | Very high (30-60% of revenue) | Low-moderate (15-25%) |
| Margin profile | 8-12% EBITDA (thin, execution risk) | 15-25% EBITDA (pricing power) |
| Customer concentration | High (govt/PSU dominance) | Diversified (industrial + consumer) |
| Cash flow | Lumpy, milestone-based | Steady, delivery-based |
| Examples | L&T, KEC International, NCC | ABB India, Siemens, Cummins |
Investment implication
Product companies (ABB, Siemens, Cummins) deserve 2-3x higher P/E than project companies (L&T, KEC, NCC) because of higher margins, better cash flows, and lower execution risk. Don't compare them on the same multiple.
Sub-sector deep dive
Power generation (BTG)
| Company | Revenue (₹ Cr) | Product Focus | Govt Dependency |
|---|---|---|---|
| BHEL | 28,000 | Thermal + solar | 90%+ PSU orders |
| Thermax | 9,500 | Industrial boilers, waste-to-energy | 40% govt, 60% private |
| Triveni Turbine | 1,800 | Steam turbines (<30 MW) | 20% (mostly private industrial) |
Transmission & Distribution (T&D)
| Company | Revenue (₹ Cr) | Focus | Key Metric |
|---|---|---|---|
| ABB India | 12,000 | Transformers, switchgear, automation | Order book growth |
| Siemens India | 18,000 | Diversified electrical + automation | Margin expansion |
| KEC International | 19,000 | Power lines, cables, railways | Book-to-bill ratio |
| Polycab | 18,000 | Cables + wires + FMEG | B2C vs B2B mix |
Defence & Aerospace
| Company | Revenue (₹ Cr) | Focus | Backlog (years of revenue) |
|---|---|---|---|
| HAL | 30,000 | Aircraft, helicopters, engines | 3.5x+ |
| BEL | 20,000 | Electronics, radar, communication | 4x+ |
| BDL | 3,200 | Missiles, torpedoes | 5x+ |
| GRSE | 3,800 | Naval ships | 3.5x |
Railways
| Company | Revenue (₹ Cr) | Focus | Growth Driver |
|---|---|---|---|
| RVNL | 22,000 | Railway EPC (electrification, bridges) | Capex allocation |
| Titagarh Rail | 4,500 | Wagons, coaches, metro | Vande Bharat + freight |
| BEML | 5,000 | Metro coaches, mining equipment | Metro expansion |
| IRCON | 12,000 | Railway EPC | Network expansion |
Revenue recognition — the accounting nuance
| Method | Used By | Impact on P&L |
|---|---|---|
| Percentage of completion (POCM) | L&T, KEC, NCC, RVNL | Revenue = work done, even if not billed |
| Completed contract | Some smaller EPC | Revenue lumpy — all at completion |
| Delivery-based | ABB, Siemens, Cummins | Revenue when goods shipped/installed |
Government dependency — the capex cycle
| Central Govt Capex (₹ L Cr) | FY20 | FY22 | FY24 | FY25 (BE) |
|---|---|---|---|---|
| Budgeted | 3.4 | 5.5 | 10.0 | 11.1 |
| Railways allocation | 1.6 | 2.5 | 2.6 | 2.7 |
| Roads/highways | 0.9 | 1.3 | 2.7 | 2.8 |
| Defence capital | 1.1 | 1.5 | 1.7 | 1.8 |
| Power/T&D (RDSS + other) | 0.4 | 0.6 | 1.2 | 1.5 |
Government capex has grown 3x in 5 years (₹3.4L Cr → ₹11.1L Cr). This is the primary demand driver for the entire capital goods sector.
Competitive moats in capital goods
| Moat Type | Example | Why It's Durable |
|---|---|---|
| Technology/IP | ABB (robotics), Siemens (automation) | Decades of R&D, global patents |
| Installed base | BHEL (60% of India's thermal capacity) | Spares, maintenance, upgrades |
| Approval/qualification | BEL (defence electronics), HAL (aircraft) | Takes 5-10 years to get qualified |
| Scale + execution | L&T (mega-projects) | Can bid for ₹10,000 Cr+ projects |
| Distribution | Polycab (cables), Havells (B2C) | 4,000+ dealer network |
Indian context
🗣️
"Capital goods mein do type ki companies hain — product companies (ABB, Siemens, Cummins) jo factory mein banaake deliver karti hain aur project companies (L&T, KEC) jo site pe execute karti hain. Product waali ka margin zyada, cash flow better, aur valuation double. Dono mein invest karo lekin same multiple pe compare mat karo."
✅ Checklist
- ○I distinguish between project-based (EPC) and product-based (OEM) capital goods companies
- ○I understand why product companies deserve higher multiples (margins, cash, risk)
- ○I track government capex budget as the primary demand driver for the sector
- ○I verify revenue recognition method (POCM vs delivery) before comparing financials
- ○I identify the specific sub-sector exposure: BTG, T&D, defence, railways, industrial
Key takeaway
Capital goods is a broad sector with vastly different business models — project EPC (8-12% margins, high working capital, execution risk) vs product OEM (15-25% margins, asset-light, pricing power). The current cycle is driven by India's 3x government capex expansion and private capex revival. Product companies (ABB, Siemens) compound steadily; project companies (L&T, KEC) offer cyclical upside. Never value them on the same multiple.
2. Capital Goods — Order Book Analysis
Why order book is the 1 leading indicator for capital goods companies Booktobill ratio: the critical metric for revenue visibility How to analyse order inflo...
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3. Capital Goods — Working Capital
Why working capital is the Achilles' heel of capital goods companies Cash conversion cycle: inventory → receivables → payables Retention money and milestone...
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4. Capital Goods — Government Policy Impact
How India's government capex boom (₹11.1L Cr FY25) drives the sector PLI (Production Linked Incentive) schemes and their beneficiaries Make in India defence...
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5. Capital Goods — Valuation
Why capital goods valuation requires subsectorspecific metrics P/E bands for product companies vs project companies Order book multiples: EV/Order Book as a...
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