Lack of visibility and drying order inflows make the sector’s future bleak.
Capital goods firms, once used to be among the top picks, have become a straight no for asset managers. This is evident from the steadily diminishing interest in the segment, whereby actual investment has almost halved in the past one year.
Moreover, in terms of percentage allocation of equity assets, the share of investment in capital goods recently slipped below four per cent, down 156 basis points so far this financial year. It is despite the fact that the capital goods index has lost a whopping 38 per cent of its value year-to-date, against a 20 per cent decline in the benchmark indices during the same period.
| LOSING SHEEN Declining interest in capital goods | ||
| Month | Exposure in %* | Actual Investment^ |
| Mar | 5.52 | 11,605.43 |
| Apr | 5.32 | 10,918.05 |
| May | 5.32 | 10,217.25 |
| Jun | 5.23 | 10,162.79 |
| Jul | 4.77 | 9,580.79 |
| Aug | 4.66 | 8,772.85 |
| Sep | 4.53 | 8,416.35 |
| Oct | 3.96 | 7,679.89 |
| * Percentage of Mutual Fund's equity assets ^In Rs crore Source : Sebi | ||
“There is nothing positive in the sector for the time being. It is hit by multiple whammy. Short-term looks are not good and long-term is bleak,” said N Sethuram, chief investment officer of Daiwa Asset Management Company.
Companies in the space are available at highly attractive valuations in the stock markets. For instance, shares of construction major Larsen & Toubro (L&T) and state-owned BHEL hit their 52-week lows this week. L&T barely managed to keep itself above Rs 1,200 — a level last seen when markets were emerging from the Lehman crisis. Similarly, companies, including ABB, Crompton Greaves, Punj Lloyd and Suzlon Energy, were trading at their one-year lows.
But these mouth-watering levels are not enough for fund managers to catch a fancy of the sector. So, what went wrong that market participants are shying away from the counter?
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“There is absolutely no visibility of the growth perspective beyond two years from now,” explained Sethuram. “The sector is struggling with several issues — lack of execution, projects stuck with clearances issues and more importantly, severe drying up of fresh inflows of orders.”
Agreed SBI Mutual Fund CIO Navneet Munot: “Macro environment issues have impacted the sector.”
In a scenario of tight liquidity, high interest costs, environmental issues and issues pertaining to land acquisitions, no company wants to set up new units, which raises concerns, according to market experts.
Kaushik Dani, equity head at Peerless Mutual fund, chooses to remain neutral on the sector. “For the time being, companies have smart order books. But that’s not enough. But what will happen going forward? In fact, the inflow of fresh orders has ‘de-grown’, which is a worrisome signal,” said Dani.
Experts say corporates in the capital goods segment are not sure of fuel linkages and, hence, the delay in execution of projects. They are of the view that unless the government’s reform process is put on fast track and hurdles are put at bay, it’s worth to shy away from the sector, despite the cheap valuations of big names in the sector.