Could India's Election Be an Opportunity for Caterpillar?

What Modi's win means for the industrial giant.

Jun 4, 2014 at 5:54PM

One area that has been a major drag on India's economic growth over the last decade has been its infrastructure. In the World Economic Forum's Global Competitiveness Report 2013-2014, India ranked No. 85 out of 139 for infrastructure. According to a PriceWaterhouseCooper's report, India's urban population in the cities of Mumbai, New Delhi, Kolkata, and Bangalore is expected to increase to 500 million by 2017. Additionally, by 2030 the country is expected to have 68 cities with populations of more than 1 million. Thus investment in infrastructure such as roads, railways, and power grids is imperative.

The same report noted that previous government had called for more than $1 trillion in new spending through 2017. Such proposed spending projects include 6,000 miles of new roads, new airports, and increased production of solar, wind, and nuclear energy. Given these lofty goals, India would seem an attractive market for the infrastructure business. However, the business environment in India is anything but ideal. Obstacles include unpredictable regulations and bureaucratic delays in approving projects and granting land rights. In addition, corruption has been a major problem in India, which ranked No. 94 out of 177 in Transparency International's Corruptions Perception Index for 2013. Consequently, many investors have passed over the nation for other opportunities.

After the BJP -- commonly known as the "Indian People's Party" -- won by a landslide in India's recent election, Narendra Modi was sworn into office as India's 15th prime minister. In his campaign, he promised to reduce the top levels of government in order to remove some of the bureaucratic red tape that has hindered the country's development. So far, his cabinet appointments have reflected this pro-business and pro-action mentality. Arun Jaitley was tapped to become India's new finance minister. Jaitley had previously served as the commerce minister from 2003 to 2004, and in that short time he helped open India up to foreign investment by increasing overseas ownership in the bank, media, and energy sectors. 

Modi selected Nitin Gadkari as his minister of transport. From 1995 to 1999, Gadkari served as the Public Works Department minister in the state of Maharashtra, where he is credited with improving the state's roadways. Moreover, he successfully dealt with regulatory obstacles in order to complete projects such as the Mumbai-Pune Expressway, as well as 55 flyover bridges in Mumbai. His appointment underscores Modi's intention to improve India's infrastructure and reduce bureaucratic hurdles.

Enter Caterpillar (NYSE:CAT). In its 2014 Q1 report, the company noted that sales 12% year over year in the Asia-Pacific region. However, this decrease owed primarily to declines in mining equipment, which fell 50% from the previous year in that region. By contrast, construction sales in that region increased by 12% year over year, which puts Cat in a much better position than competitor Joy Global (NYSE:JOY), whose entire operation consists of mining.

Joy has found success in China, which is the world's larger consumer of coal. However, Joy is unlikely to have similar success in India, even though the country is poised to surpass China as the leading coal-consumer as soon as this year. More than 90% of the coal mined in India is mined by government-owned companies. The role played by private companies is limited for the purpose of self-consumption, e.g., steel production or power generation, so Joy faces a high barrier to entry in India. 

Caterpillar's boost in Asia-Pacific construction sales doubtless owes primarily to China, which invested $2.7 billion in construction projects last year and is reportedly on track to exceed that investment this year. Caterpillar's market share in China stands at roughly 6.3%. By contrast, in India Caterpillar is only a major supplier of wheeled loaders, crawler dozers, and motor graders. The infrastructure improvements that the country needs will require more excavators, backhoe loaders, and dump trucks, of which Cat has the highest quality in the world.

With a clear majority in the Parliament of India favoring a pro-business platform, the opportunity for Caterpillar to break ground on more infrastructure projects seems significant. Through reductions in interest rates and a friendlier FDI environment of more tax credits and less red tape, Caterpillar seems to be in the perfect position to supply India's construction-related demand. The only wild card that remains is the extent to which Modi can turn his pro-growth and anti-corruption rhetoric into action.

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