Consumer durable, capital goods stocks outperform. Should you buy?

Thus far in CY17, the consumer durable and the capital goods indices have rallied 33% and 19%

BSE's Capital Goods and Consumer Durable indices hit their respective 52-week high levels on Wednesday. Since the outcome of the assembly polls in March 2017, both the indices have outperformed the market by surging more than 5%. By comparison, the S&P BSE Sensex was up 2% during this period.

Thus far in the calendar year 2017 (CY17), the consumer durable and the capital goods indices have rallied 33% and 19% respectively, as compared to 11% rally in the S&P BSE Sensex.

Among individual stocks, Bharat Heavy Electricals Limited (BHEL), BEML, Greaves Cotton and VA Tech Wabag from the capital goods index and Havells India, Symphony, Nilkamal, V-Guard Industries, Titan Company, Whirlpool of India and Crompton Greaves Consumer Electricals from the consumer durable index have soared more than 30% each thus far in 2017.

Larsen & Toubro (L&T), ABB India, SKF India, Kalpataru Power Transmission, AIA Engineering and Thermax were up between 15% and 30%.

Also pushing the consumer durables index and the related stocks higher was the expectation of a hotter-than-usual summer in 2017. In its March forecast, the Indian Metrological Department (IMD) cautioned against “above normal” temperature across the country this season.

Several states, according to the Indian weather forecaster, are likely to witness heatwave conditions. This, in turn, should generate a good demand for appliances such as air conditioners, air coolers, fans etc., analysts say.

The home appliance industry in India, according to experts, is significantly under-penetrated and is likely to grow at a healthy pace over the next few years. As per CRISIL estimates, the home appliance industry comprising colour televisions (CTVs), refrigerators, washing machines and air-conditioners (ACs) posted a 13.2% compounded annual growth rate (CAGR) in value terms over FY10-FY16, and stood at Rs 58,000 crore as of FY16-end.

“We expect the home appliance industry to post a 15% CAGR in volume terms over the next five to seven years. India’s per capita GDP has increased from Rs 55,366 in FY10 to Rs 116,531 in FY17E, translating to 11.2% CAGR. On the other hand, the average selling price of refrigerators, washing machines and air-conditioners increased by only 6.4%, 5.0% and 5.4%, respectively,” says Chirag Muchhala, an analyst tracking the sector with Nirmal Bang Institutional Equities.

“Rising affordability and growing necessity of white goods is likely to spur consumer demand and improve the penetration levels for these three categories that remain low at 23%, 11% and 5%, respectively,” he adds.

Analysts see capital goods related stocks doing well over the medium-term, as underlying economic growth gradually picks up in pockets and spreads to other areas.

“While synchronous recovery is still some time away, select capital goods businesses leveraged to early recovery will do well. On the consumption side, businesses more leveraged to rural economy might do well as buying power recovers both due to more government focus on rural areas and better productivity. Consumer durables might prove to be a multi-year story,” said Harshad Patwardhan, CIO – Equities at Edelweiss Asset Management.

Analysts see the rally in capital goods stocks continuing for some more time, as stocks play catch up in the hope of revival in order flows.

"Capital goods index has underperformed the markets since the second half of 2015. This was because the capex plans (especially private sector) got stuck and order visibility and execution remained poor. Now, these stocks are playing catch-up on optimism that order flows will resume and execution will improve over time," explains Deepak Jasani, head of retail research at HDFC Securities.

"That apart, the presence of multinational companies (MNCs) in the index like ABB, Siemens  which haven’t faltered much and value unlocking by L&T (heavyweight in the index) due to listing of its two subsidiaries have also helped.  I don’t think the rally in capital goods stocks is over yet. They can continue to play catch-up over the next couple of quarters," he adds.