Capital goods stocks in focus; L&T nears record high

At 1507 hours, the S&P BSE Capital Goods index was up 1.8% compared to a 0.36% decline in the S&P BSE Sensex.

Shares of capital goods companies were trading higher in an otherwise subdued market ahead of May IIP (index of industrial production) data and on expectations of better-than-expected financial performance in the April-June quarter.

Larsen & Toubro (L&T) was up 2.5% at Rs 1,849, a mere 2.3% away from its record high of Rs 1,893 touched on the Bombay Stock Exchange (BSE) on March 4, 2015.

Bharat Heavy Electricals Limited (BHEL), Thermax, Kalpataru Power Transmissions, Siemens, Suzlon Energy, Sadbhav Engineering and Crompton Greaves were up 2%-6% each.

At 1507 hours, the S&P BSE Capital Goods index was up 1.8% or 328 points at 18,238 compared to a 0.36% decline in the S&P BSE Sensex.

Since June 12, 2015, the capital goods index has rallied 10% after the IIP grew by 4.1% in April compared to 2.5% in March. The benchmark index had gained 4.5% during the period. The May IIP data is due on Friday.

Post April IIP data, CRISIL Research said the 3-month moving average of the IIP series, which is much less volatile, is showing an improvement. The consumer-oriented and investment-oriented sectors are also steadily climbing up. In addition, uptick in the steel sub-index growth in April signals that construction activity might pick up in Q1 FY16.

Meanwhile, Anand Kumar, an analyst at Bank of America Merrill Lynch, expects most mid-cap Indian engineering & construction (E&C) players to have a robust quarter, with a  growth of 18.5% on a year-on-year (YoY) basis due to an improvement in margins and operating leverage.

We expect capital goods to post flat revenue growth owing to limited on-ground pick-up across power and infra projects. The order intake is expected to be healthy, led by strong ordering in power generation and T&D sectors. Margins are expected to improve by around 60 basis points, albeit on a low base, Edelweiss Securities said in Q1 results preview.