4 capital goods stocks that look attractive

While the Budget might have been a sentiment booster for the sector, firms with market dominance emerge as favourites

The Budget has some neat takeaways for the capital goods sector. For instance, excise duty reduction from 12.5 per cent to six per cent on certain components required for the manufacture of pumps. Or imposition of 12.5 per cent duty on import of road construction equipment. Both will benefit the segment.

The scrips of Cummins India, Crompton Greaves, Lakshmi Machine Works (LMW), Thermax and Voltas have gained by two to 10 per cent, thanks to these measures. There are no detailed estimates on how much revenues will benefit from these moves but the industry feels it would boost the pricing power of domestic companies, to combat competition from foreign manufactures.

Also, the excise duty cut might provide some relief to their revenues, though not very significant. However, for some like Cummins India, which saw an excise duty outflow of Rs 304 crore in FY15, this might halve.

Misal Singh of Religare adds that with demand issues being more challenging, a change in the rate structure might not be a huge catalyst. Analysts, however, say this move is a push for improving India’s domestic capabilities and align the sector to the ‘Make in India’ campaign.

  Taking into account the Budget amendments and the overall operating environment for the segment, stocks such as Cummins India, Crompton Greaves, LMW and Voltas emerge as favourites. These are either market leaders or among the top entities in the segment they operate. So, even if dull market conditions pinch their earnings in the near term, most of them dominate, making them well-positioned to wade through these challenges. The stock price correction in recent months provides an attractive entry point to these.

Crompton Greaves: Having maintained its third position in the domestic motor market, Crompton Greaves’ domestic power and industrials business has seen a healthy 28 and 12 per cent return on equity, respectively, in a tough demand scenario. Sale of its distressed international power units will bring needed respite to its revenue in FY17 and lower debt. Motilal Oswal Securities has upgraded its target price estimates for FY17 and FY18 by 15 per cent and 83 per cent, respectively, post the sale of the foreign power subsidiaries. The Street pegs the non-consumer business to trade at Rs 70 a share. The stock will start trading ex-consumer business from Tuesday.

Cummins India: Despite difficult times, Cummins has expanded its revenue growth from its core segments, namely, power generation and industrials by 23 per cent and six per cent year-on-year, respectively, so far in FY16. Due to its strong presence in the medium and high horsepower engines segments, HDFC Securities says Cummins will benefit from capital expenditure revival in sectors such as infrastructure, mining, railways and defence, and is one of the best stocks to play the domestic capex cycle recovery.

LMW: Being a market leader with a little over 60 per cent share in the domestic textile machinery sector, LMW also managed to grow its exports, despite a weak global demand situation, by a little over seven per cent year-to-date in FY16. Almost debt-free, with cash of Rs 900 crore in FY15, the order book is also healthy at Rs 2,580 crore. Analysts at Nirmal Bang feel with a strong management pedigree, market leadership and export focus, LMW will continue to provide a high margin of safety and an economic moat to investors.

Voltas: A dominant presence in the cooling solutions segment has helped Voltas grow its revenues by 8.3 per cent in FY16, though its profits have come under pressure due to weak execution of the electro mechanical projects (EMP) division, mainly focused on foreign markets, such as in West Asia. While its order book dipped 11 per cent over a year in the December’15 quarter, analysts at ICICI Securities say it trades at attractive multiples, considering the strong performance of the unitary cooling products business and likely recovery in the EMP segment (from this quarter).