27 Jul 2026
SEBI Registered Name - Kotak Mahindra Mutual Fund
SEBI Registered Number - MF/038/98/1
The foundations of long-term economic growth are built through investments. Whether it is expanding power networks, modernising transportation infrastructure, strengthening domestic manufacturing, enhancing defence capabilities or building a semiconductor ecosystem, each of these initiatives requires significant capacity creation. The Capital Goods sector sits at the centre of this process, supplying the equipment, engineering expertise and industrial infrastructure needed to transform investment plans into productive assets. As India continues to invest across strategic sectors, capital goods remain closely linked to the country's development journey.
A key driver behind the sector's momentum has been the sharp rise in government capital expenditure. Central government capex has increased from ₹3.4 lakh crore in FY20 to ₹12.2 lakh crore in FY27BE, reflecting a sustained focus on asset creation across roads, railways, defence, power, renewables and urban infrastructure. Such investments create demand across a wide spectrum of capital goods segments, providing a strong foundation for long-term growth.
Source: Union Budget Documents, Ministry of Finance | as per latest data available
The impact is already visible in industry fundamentals. India's capital goods output has grown from ₹2.3 lakh crore in CY15 to ₹4.3 lakh crore in CY24, highlighting the expansion of the country's manufacturing ecosystem. At the same time, sector order books have strengthened to approximately ₹5.2 lakh crore, while book-to-bill ratios have improved, indicating healthy demand visibility and a robust project pipeline.
One of the largest opportunities lies in the power sector. India's peak power demand is projected to reach ~366 GW by FY32, driving substantial investments in generation, transmission and distribution infrastructure. As electrification deepens and economic activity expands, demand for transformers, substations, switchgear, transmission equipment and grid modernisation solutions is expected to remain strong.
Source: Central Electricity Authority (National Electricity Plan 2022–32)
The transmission and distribution segment is particularly noteworthy. India's electricity transmission network and transformation capacity are expected to expand significantly in the coming years, supported by rising power consumption and renewable energy integration. Growing investments in grid infrastructure and electrification are likely to support demand for higher-value electrical equipment and advanced transmission technologies.
Global transformer shortages have further strengthened the outlook for power equipment manufacturers. Lead times for large power transformers have increased from 12 months in 2019 to 30 months in 2025, while certain specialised transformers are witnessing lead times of up to 48 months. This supply-demand imbalance has created opportunities for manufacturers capable of delivering quality products at scale.
Source: Wood Mackenzie; Mordor Intelligence Transformer Market Report 2025; Elara Capital Sector Update (Apr 2026); Whalesbook Industry Note (May 2026).
Beyond power, railways and metro infrastructure continue to be important growth drivers. Ongoing investments in railway modernisation, propulsion systems, metro networks and high-speed rail projects are generating demand for engineering solutions, electrical systems, signalling equipment and associated industrial products. As transportation infrastructure remains a key area of public investment, opportunities across railway equipment continue to expand.
Defence manufacturing represents another structural growth theme. India's push towards self-reliance and localisation has supported a significant increase in domestic defence production capabilities. Defence exports have grown from ₹686 crore in FY15 to ₹23,622 crore in FY25, highlighting the progress made by the sector. Continued focus on indigenisation, defence capital expenditure and domestic manufacturing could support long-term opportunities across aerospace, electronics, shipbuilding and defence systems.
Source: Ministry of Defence Annual Reports, Motilal Oswal Defence Sector Update April 2026
The semiconductor ecosystem is emerging as another important pillar of India's industrial strategy. India's semiconductor market is projected to reach US$155 billion by CY31, supported by government incentives, manufacturing investments and a strong design talent base. The development of semiconductor facilities, OSAT and ATMP capacities may create demand across precision equipment, industrial automation, electronics manufacturing and supporting infrastructure.
India's strength is not limited to manufacturing ambitions. The country has an estimated 3 lakh chip designers, accounting for roughly 20% of the global talent pool. Combined with policy support and state-level incentive programmes, this design advantage strengthens India's position in the global semiconductor value chain.
Renewable energy is further expanding the opportunity set. India's installed solar power capacity target is expected to increase from ~150 GW in FY26 to ~280 GW by FY30E, driving investments across modules, cells, transmission systems and associated infrastructure. In parallel, Battery Energy Storage Systems (BESS) capacity is expected to scale meaningfully, supporting the integration of renewable energy into the power grid.
Source: MNRE, Nuvama Research | data beyond FY26 is an Estimate | as per latest data available
The Capital Goods sector is also benefiting from broader manufacturing expansion. India's machine tools industry continues to grow alongside rising industrial activity, reflecting increasing demand for advanced manufacturing capabilities. As sectors such as automotive, aerospace, defence, electronics and engineering expand, demand for industrial machinery and precision equipment is expected to remain an important growth driver.
What makes the current cycle noteworthy is the diversity of growth drivers. Unlike earlier periods that were dominated by a few investment themes, the present cycle is supported by simultaneous momentum across infrastructure, power, railways, defence, semiconductors, renewable energy and manufacturing. This broad-based participation creates a wider opportunity set across the capital goods value chain.
Overall, the Capital Goods sector remains closely aligned with India's investment-led growth agenda. Rising government capex, expanding manufacturing activity, power infrastructure upgrades, defence indigenisation, renewable energy capacity additions and semiconductor investments are collectively creating a multi-year opportunity. As India continues to build productive capacity across the economy, the Capital Goods sector is likely to remain an important enabler of the country's long-term development.
Disclaimer:
KMAMC is not guaranteeing/offering/communicating any indicative yield/returns on investments. The stocks/sectors mentioned in this slide do not constitute any recommendation and Kotak Mahindra Mutual Fund may or may not have any future position in these sectors/stocks.
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