Funds put money in power equipment makers

Bet on economy turning around after the polls, with a pro-business govt; analysts warn this might go awry

Domestic fund managers stocked beaten-down shares of power equipment makers to the tune of about Rs 2,800 crore between October and December 2013, encouraged by cheaper valuations and hopes that the worst was over for the economy.

As on December 31, mutual funds’ exposure to the capital goods sector as a percentage of the total equity assets under management (AUM) was 8.6 per cent, against 7.5 per cent on September 30. Investor appetite for the sector drove up shares of Bharat Heavy Electricals, Siemens, Havells and Crompton Greaves, helping the BSE’s capital goods index gain 33 per cent during the quarter. It outperformed the National Stock Exchange benchmark, the Nifty, which rose 10 per cent in the period.  

“Many people are taking a call that the economy has bottomed out and will perhaps see a turnaround. What they are betting on is that whenever the economy shows signs of revival, these stocks will be the first to see an uptake,” said Kaushik Dani, head of equity, Peerless MF.

From January 1 to September 30, 2013, the capital goods index fell 30 per cent against a 2.5 per cent decline in the Nifty. Fund managers sensed an opportunity in these shares in September but bought aggressively only from October. From September 1 to December 31, MFs’ exposure to capital goods shares rose about Rs 3,400 crore, to Rs 13,600 crore, according to Value Research.

Analysts said many investors are betting that a Bharatiya Janata Party-led government, considered pro-business, would win the national elections in April, reviving business sentiment. “The hope is with a stable government at the Centre, the reform process would gather speed,” said Mayuresh Joshi, head (institutional sales), Angel Securities. “The markets had started to factor this in two-three quarters before and are trying to play these stocks with a pre-lag effect.” Money managers warn elevated share prices are deceptive to a certain extent because earnings prospects of most of these companies are far from rosy. Order books have dried, while it will take some time for a fresh investment cycle to reflect on companies’ earnings.

“We are underweight on this sector because there is still no upturn in the investment cycle. Companies’ results till now have not shown any uptick in earnings,” said Varun Goel, head, portfolio magement, Karvy Stock Broking.