Strong orders to keep capital goods stocks in demand

The rally in capital goods stocks that was noticed on Thursday following the L&T results, continued further on Friday. Even as the Sensex inched up 0.75 per cent to 9520.96, the BSE Capital Goods index firmed up 2.06 per cent to 6266.08.

Most capital goods stocks soared on back of continued expectations of strong order books in coming quarters and other factors that augur well for the sector like demand driven by industrial growth and infrastructure development.

An analyst from Karvy Stock Broking says that earlier, the results declared by L&T served as a major trigger. The company reported a net profit of Rs 259.3 crore for Q3 December 2005, a growth of 95.9 per cent y-o-y and total income of Rs 3782.79 crore, a growth of 14.2 per cent.

The company had secured a turnkey order of Rs 1300 crore from ONGC for an offshore project, some time back. Moreover, the uptrend in the Sensex over recent past has perked up the general sentiment.

Brokers feel that the strong 180 bps point growth in L&T's EBITDA margins was a big positive for the sector.

The company's order book doubled in the third quarter ended December FY06 and in a statement the company has said that it expects the order flow to maintain over Q4. Margins in Q4 are also expected to be eight per cent as compared to 7.2 per cent in corresponding previous quarter.

Analysts believe that overall, the sector is doing well on back of a strong pick up in the capex cycle. Even Bhel has reportedly won an order for a power project in Himachal.

On Friday, the biggest gainers in the category were Reliance Industrial Infrastructure (up 10 per cent to Rs 391.7), ABC Bearings (up 9.89 per cent to Rs 140.55), ABB (up 7.03 per cent to Rs 2249.65), Alstom Projects (up 5.43 per cent to Rs 264.95), Atlas Copco (up 5.17 per cent to Rs 1275), Revathi Equipment (up five per cent to Rs 1104.15) and Bhel (up 3.25 per cent to Rs 15814.35).

Most stocks in the sector have seen an upswing in the past few days. L&T had firmed up ahead of its results, rising to a lifetime high of Rs 1861.85 on January 17. Major gainers over the past week include ABB (up 13.05 per cent), MM Forging (up 11.31 per cent), Reliance Industrial Infrastructure (up 11.18 per cent), Alstom Projects (up 9.98 per cent), Kennametal (up 9.38 per cent), Bhel (up 8.17 per cent), ABC Bearings (up seven per cent) and L&T (up 3.63 per cent).