Shares of companies in the capital goods segment have seen renewed interest from investors. The sector, among the most beaten down and the subject of persistent negative sentiment, could see a rally as the economic scenario improves, say experts.
So far this financial year, the Bombay Stock Exchange’s capital goods index has beaten the benchmark index by a little over 200 basis points, 8.1 per cent up for the Sensex and 10.4 per cent up for the capital goods counter.
Persistent bad news such as high interest rates, absence of fresh capital expenditure and drying of order inflows had taken the sector off investors' radar. Now, it seems, investor confidence is gradually rising, after a long lull. For instance, foreign institutional investors have been steadily raising their holdings in major companies such as ABB, BHEL, Havells, Larsen & Toubro (L&T), Thermax, Siemens, SKF India and in the struggling Thapar group’s Crompton Greaves, too.
| SETTING TREND Year-on-year growth (in %) | ||
| TTM Net sales | TTM Net profit | |
| Larsen & Toubro | 21.55 | 20.67 |
| BHEL | 9.83 | 9.01 |
| Suzlon Energy* | 8.57 | - |
| Siemens* | 9.56 | -35.86 |
| Crompton Greaves | 13.33 | -55.11 |
| Punj Lloyd* | 26.26 | - |
| ABB* | 9.75 | 59.20 |
| Jindal Saw | 15.41 | -46.17 |
| Bharat Electron | -2.27 | -29.84 |
| Thermax | -3.84 | -6.05 |
| Havells India | 22.83 | 27.25 |
| Alstom T&D India# | -22.37 | -29.96 |
| Alstom India | 36.03 | 48.13 |
| BEML Ltd# | -3.74 | -98.72 |
| SKF India | -3.22 | -6.51 |
| Pipavav Defence# | 105.63 | -78.17 |
| Lak. Mach. Works | -8.77 | -40.03 |
| AIA Engineering# | 30.67 | 6.80 |
| Praj Industries | 12.69 | -12.71 |
| TTM = Trailing 12 months; # TTM ended on June 2012 Source: Capitaline; Compiled by BS Research Bureau | ||
Mutual fund managers, who had drastically cut exposure in this counter, have began to scale up their overall investment here. “Incrementally, the scenario for capital goods looks better, with possible improvement on the execution side,” said Navneet Munot, chief investment officer at SBI MF. He says margins are likely to improve, with input costs going down and rate cuts expected next year.
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L&T has been an outperformer not only in the sector but also in the overall broader markets, as its shares have risen close to 30 per cent so far in FY13. Bharat Heavy Electricals Ltd (BHEL), another heavyweight, which went below Rs 200 in September, has jumped back and is trading at Rs 232. This, though, is still half of where it was two years before.
Apart from L&T, market participants are bullish on BHEL and Thermax. “Capital goods are set for a steady rally. It’s too much of consumption rally now,” explains the equity (institutions) head at a Mumbai-based brokerage firm. According to him, there could be good momentum in the counter, as he expects rate cuts in the first quarter of calendar 2013. “Investors need not do aggressive buying but accumulate on selective counters, at least from a one-year to two-year horizon in their portfolios,” he says.
There’s also a word of caution from a section of market participants. “The sector requires actions from the government. Unless execution happens and investment starts pouring in for expansion, it’s hard to see why the sector would see an upside,” cautions the chief investment officer of a foreign fund house. “The current market movement is a function of global liquidity. Despite bad news, inflows are not letting shares crack. Investors need to be cautious on this sector.”