Mumbai: The BSE Capital Goods index has advanced 2.4% in the past week, outperforming the Sensex’s gain of 0.3%. One reason could be because most of the negatives, especially tepid order inflows, are already priced in. Remember, it is among the worst performing sectors this calendar year. Also, with the GDP growth taking a severe hit, there are expectations that the Reserve Bank of India may start cutting the interest rates as early as the first quarter of 2012.
Additionally, eight key infrastructure sectors have also clocked robust output growth in November, at 6.8% against 3.7% during the same period last year. This was helped by stellar growth in cement, electricity and refinery products. The growth has actually shown a sharp uptick sequentially after a flat 0.3% growth reported in October. So is it safe to say if the capital goods shares have bottomed out?
Well, one swallow does not make a summer. Shubhada Rao, Chief Economist from Yes Bank said, “(I) cannot say if the core sector growth is sustainable sequentially. The investment sentiment and business activity may remain lacklustre for couple of more quarters because it generally lags the interest rate cycle.”
Order book declined significantly by 62% year-on-year and 66% sequentially for capital goods companies covered by Emkay Financial Services, the brokerage said in a note.
“Risk to FY13 earnings exists from low order book cover and deferral of orders especially for big players like Larsen & Toubro and BHEL,” said the brokerage. Also, policy inaction, slowdown in government spending and high competition may continue to weigh on the stocks. The growth forecast for FY12 is cut below 7% against 8% in the beginning of FY12 which may also play spoil sport.
Some of the capital stocks have fallen over 50% year to date and trading below 2x price to book value, but a further 10-15% downside cannot be ruled out. John Perinchery, Capital Goods Analyst from Asian Market Securities said, “Shares are close to bottoming out, but the trigger for rally will be improvement in the capex cycle as it will drive the order inflow. This may happen once the Reserve Bank of India cuts rates by 75 to 100 bps.”
Also the base effect may start kicking from November after the capital goods index plunged 25% in October, which may give some respite to these stocks.