Indo-US nuclear agreement excites capital goods stocks

Sectoral rise with positive news on Indo-US nuclear deal, rise in overall benchmark on general optimism

Stocks of the capital goods sector rallied after the logjam over the India-US nuclear agreement was broken during US President Barrack Obama’s three-day visit to India which ended on Tuesday.

The index tracking the sector on the BSE rose 1.8 per cent on Tuesday, the first trading day of the week. Markets were shut on Monday for Republic Day celebrations.

Capital goods stocks rose in anticipation of higher military spending that could follow the nuclear agreement, which pushes forward a deal in limbo since 2008. More, Obama promised to further strengthen defence cooperation.

“There was fresh buying in this sector after a long time. It had been under-performing the benchmark indices for two-three months,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services. “The rally in this sector is expected to continue for about six months.”

Sector analysts expect these stocks to move up by as much as 15-20 per cent in the next six months, with Budget expectations and hope of change in the infrastructure landscape.

Larsen & Toubro, the volume topper in the index for the day, was up 2.07 per cent. The highest gainer in the S&P BSE Capital Goods index was Alstom India, up a little over eight per cent, followed by Bharat Electronics (BEL), up a little more than five per cent. France-based Alstom India is active in the power and transport sector; BEL provides communication equipment. Thermax and Fag Bearings India were up three per cent, while Suzlon and Siemens were up a little more than two per cent.

Many of these stocks are also believed to be trading at relatively high valuations. “Some of these are trading as high as 20 times the price to earnings (P/E) multiple. The surge we saw today is largely perception-based and sentiment-based. It will be a long time before we see any on-the-ground action,” said Chokkalingam G, founder and managing director, Equinomics Research and Advisory.

However, he adds, Budget announcements could give a push to some infra projects, a positive for these companies.

On Tuesday, the main benchmark indices rose about one per cent, on the back of the optimism in the markets since the Reserve Bank cut is prime lending rate by 25 basis points, on January 15. The BSE Sensex rose for an eighth straight session, by one per cent or 292 points, to a record 29,571. The NSE Nifty was up 0.85 per cent or 74 points, to a record 8,910.