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Capital goods stocks may re-rate on Govt capex push, firm demand: Analysts

Inflation remains a key risk for margins amid geopolitical tensions. But, analysts expect this to improve from the second half of FY23 due to declining commodity prices and strong order inflows

capital expenditure, capex
Illustration: Binay Sinha
Harshita Singh New Delhi
3 min read Last Updated : Sep 21 2022 | 10:14 PM IST
Stocks of capital goods companies could see a positive re-rating in the medium-term as the sector is poised for healthy growth in fiscal 2022-23 (FY23) on the back of the government’s strong capital expenditure (capex) push, analysts say.

They believe that increased allocation to government capex in the latest budget coupled with centrally sponsored schemes (such as PLI) is likely to augur well for the sector going ahead.

Those at HDFC Securities, for instance, believe that spending plans across large verticals such as roads, railways, defence, and power provide long-term visibility to the government's capex plans. This, along with welfare schemes, will drive public expenditure for the next few years.

“The recent post-Covid pick-up is looking sustainable with drivers in place for multi-year growth. Government capex during FY20-22 has been countercyclical and while growth rates will taper down a bit due to the base effect, it still looks set for an 8-10 per cent CAGR growth over the next 3-5 years on the basis of projects/schemes already under implementation,” the brokerage said.
At the bourses, Siemens, Thermax, Cummins India, BEL, HAL are some of the top performers, having risen 25-58 per cent so far in CY22. In comparison, the BSE Capital Goods and the BSE Sensex indices have gained 14 per cent and 2 per cent, respectively, during this period.
Another catalyst for the stocks from this sector, analysts said, is the possibility of a revival in private capex, which is also keeping experts bullish on this space. The major drivers leading to an upcycle in private Capex include deleveraged corporate balance sheets, healthy profitability, rising domestic demand as well as mid-cycle capacity utilization, experts add.

"Along with government spending, private capex is also on an upswing, especially in sectors like cement, metals, food & beverages, which is leading to higher order intake for the capital goods firms. Easing supply chain issues is also a positive. Given these factors, we expect sector earnings to grow by 25-30 per cent in FY23", said Khadija Mantri, Assistant Vice President, Research at Sharekhan.


That said, inflation remains a key downside risk for profit margins of capital goods companies amid geopolitical risks. But, analysts expect this to improve from the second half of FY23 due to declining commodity prices, and strong order inflows.
In terms of valuation, the sector would continue to be expensive as it remains on the cusp of an upcycle given multiple opportunities, according to Khadija Mantri of Sharekhan. The average two-year forward sector PE between 20-22 times the FY24 estimated EPS is a tad higher than the historical valuation, she said.

Among stocks, analysts at Morgan Stanley said there is a rising focus on indigenization in defence spending, hence, they believe L&T, HAL and BEL are the best ways to play these themes.

"Furthermore, a few industrial goods companies would be beneficiaries of the improving real estate cycle and rising electrification. Larger companies in these segments would continue to benefit from unorganized players losing their share," they said.

Topics :SensexCapital goods Marketsstock marketsNiftyKEC InternationalL&T Larsen & TourboSiemensThermaxHindustan AeronauticsBhel

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