Is a re-rating on the cards for capital goods stocks?

A 35% increase in the on-going fiscal year's capital budget outlay has been a catalyst for the capital goods companies this year.  

On the bourses, Siemens, Thermax, Cummins India, BEL, and HAL have risen 25-100% so far in 2022 as compared to a 14% and 2.5% gain in the BSE Capital Goods and Sensex indices. 

The government’s capital expenditure push and the sustained demand momentum across industries continue to keep analysts upbeat on this space. 

Rohit Khatri, Assistant Vice-President, Fundamental Research, Religare Broking says he's positive on capital goods over medium-to-long term. Increased govt spending key growth driver. Consumption picking up pace is another positive. All high-frequency indicators hint at robust economic growth

A healthy revival in private sector spending is also taking place, which is leading to a higher intake in order inflows, analysts say.  

According to HDFC Securities, private sector capex has lagged that of government's expenditure during FY20-22 but it will now outpace public capex due to increasing spending across sectors such as cement, metals, power, auto and others.

Experts add that declining input costs are also lifting the prospects of companies, as margin pressures are likely to improve from the second half of FY23.

Khadija Mantri, Assistant Vice-President, Research, Sharekhan by BPN Paribas say supply chain issues like chip shortage easing out. See FY23 sector earnings growth at 25-30% YoY. Multiple re-rating possible in L&T, KEC International, Va Tech Wabag and others. Sector to command higher valuation on multiple growth triggers

That said, markets will react to the US Fed’s rate hike decision and its commentary on the inflation trajectory today. 

Monetary policy outcomes by England and Japan’s central banks will also be tracked later today.