BHEL, L&T Stocks Plunge on Chinese Competition Fears

Introduction

Shares of major Indian engineering and capital goods companies, including Larsen & Toubro (L&T), Bharat Heavy Electricals Ltd. (BHEL), ABB India, and Siemens, experienced a significant decline on Thursday. The sharp fall was triggered by a media report suggesting that the Indian government is considering the removal of five-year-old restrictions that limit Chinese companies from bidding for public sector contracts. This potential policy shift has raised investor concerns about increased competition for domestic firms that rely heavily on government orders.

Sharp Sell-off in Capital Goods Stocks

The market reaction to the news was immediate and severe. BHEL was the hardest hit, with its share price tanking nearly 14% during intraday trading to a low of ₹261.40. This marked the stock's biggest single-day drop since the Lok Sabha election results on June 4, 2024. The stock eventually closed around 9% lower. Other prominent players in the sector also faced heavy selling pressure. ABB India's shares dropped nearly 6%, while Siemens and L&T shed approximately 4.6% and 4%, respectively. The sell-off was reflected in the broader sector, with the BSE Capital Goods index falling 2.3% against a 0.91% decline in the BSE Sensex.

The Policy Under Review

The catalyst for the market downturn was a Reuters report, citing government sources, which stated that India's Finance Ministry is planning to scrap the curbs on Chinese firms. These restrictions were implemented in 2020 following deadly border clashes in the Galwan Valley. Under the current policy, Chinese bidders are required to register with a designated government committee and obtain both political and security clearances to participate in public tenders. This process has effectively barred most Chinese companies from competing for government contracts, which are estimated to be worth between $100 billion and $150 billion.

Rationale Behind the Potential Change

The government's consideration to ease these restrictions is reportedly driven by a desire to normalize commercial ties with China amid an easing of diplomatic and border tensions. Additionally, the report highlighted that existing curbs on equipment imports from China have hindered India's plans to expand its thermal power capacity. India aims to increase its thermal capacity to nearly 307 GW over the next decade, and a high-level committee has reportedly recommended easing the restrictions to facilitate this goal. The final decision on this policy change, however, will be made by the Prime Minister's Office.

Impact on Indian Engineering Giants

The potential return of Chinese competitors is a significant concern for Indian capital goods firms. For the past five years, companies like BHEL, L&T, Siemens, and ABB India have operated in a relatively protected environment for government projects. The absence of deep-pocketed Chinese firms allowed them to secure large orders, supported by a steady rise in government capital expenditure. If the restrictions are lifted, these Indian companies will have to compete directly with Chinese firms, which are often able to offer more aggressive pricing. This could put pressure on profit margins and order inflows for the domestic players.

Order Book and Financial Context

The stakes are high for companies with substantial government-linked order books. As of September 30, 2025, BHEL's total outstanding order book stood at ₹2.19 trillion. A significant 80% of these orders, amounting to ₹1.75 trillion, are from the power sector, which is heavily influenced by government policy and spending. The remaining orders come from industry and exports. This heavy reliance on the power sector underscores the company's vulnerability to increased competition in government tenders.

Analyst Perspective and Market Outlook

Despite the immediate negative reaction, some analysts maintain a positive long-term view on the sector. A recent note from brokerage firm Motilal Oswal highlighted that the capital goods sector is well-positioned for sustained growth, supported by a strong order backlog and the government's continued push on infrastructure and defence. However, they advised investors to monitor commodity price trends and the pace of private sector ordering. India is projected to require over $1 trillion in infrastructure investment in the coming decade to meet its economic targets, ensuring a large pipeline of projects. The key uncertainty remains the competitive landscape if Chinese firms re-enter the market.

Conclusion

The sharp fall in the stock prices of India's leading capital goods companies underscores investor anxiety over a potential policy shift that could reintroduce fierce competition from Chinese firms. While the restrictions imposed in 2020 provided a significant advantage to domestic players, their potential removal could reshape the bidding landscape for large-scale government projects. The final decision from the Prime Minister's Office is now a critical event that the market will be watching closely, as it will determine the competitive dynamics for the sector in the years ahead.