Capital goods up on cheaper valuations

Opinion divided on prospects in coming months, due to doubts on timing and extent of order inflow revival in sector

Shares of various capital goods companies surged on Wednesday, as investors found value in battered stock prices.

Fund managers said there was room for further upside in these because of recent underperformance against the main index. However, analysts are not so optimistic about the sector's business prospects.

The Bombay Stock Exchange's capital goods index rose 2.5 per cent on Wednesday, compared to the 0.6 per cent gains in the Sensex. Among power equipment makers, Alstom India jumped 8.9 per cent, Bharat Heavy Electricals gained 2.2 per cent and Crompton Greaves was up 0.9 per cent.

"Most of these shares have been beaten down in recent months because of lack of order inflows and high interest cost burden. But, investors are finding these cheap, compared to most other sectors," said Sandip Sabharwal, chief executive officer-PMS of Mumbai-based brokerage firm Prabhudas Lilladher.

 

Engineering to construction conglomerate Larsen & Toubro (L&T) gained 2.9 per cent to Rs 1,433.70 on Wednesday, after Goldman Sachs upgraded the stock to 'buy' from 'neutral', citing cheap valuations after its recent underperformance against the Sensex and stable revenue growth prospects.

"With the announcement of infrastructure reforms over the past six months, we believe there are more tailwinds for L&T, an industry incumbent, versus earlier," said Goldman analysts Pulkit Patni and Mohit Soni in a client note. So far in 2013, L&T shares have fallen almost 11 per cent against a one percentage decline in the Sensex.

Investors are a lot more optimistic about investments picking up after the government's emphasis on the sector in the Budget. A cut in interest rates would also make it easier for these debt-ridden companies to tap working capital. But, analysts feel order inflows might take time to happen.

 

"Investors appear bearish to neutral on the Indian capital goods sector, where we believe there are signs of the demand outlook improving," said Girish Nair, analyst at BNP Paribas Securities. "Investors felt there would be a lot more pain over the next year due to a lack of visibility."

Analysts said if the government pushed its companies to start spending idle cash, it could spark a revival of the investment cycle.

"We see the following signs of revival -" stalled projects getting cleared after the recent formation of the Cabinet Committee on Investment; the start of ordering for major projects like the dedicated freight corridor and metro rail capex being in progress. We expect ordering for oil and gas refining to revive by the end of this year," said BNP Paribas' Nair. The investment bank has a 'buy' rating on Crompton Greaves and Siemens, with a 'reduce' on ABB.