Earnings Preview: Capital Goods

Earnings Preview: Capital Goods

After consistent underperformance in the previous few quarters, capital goods stocks outperformed the market convincingly in Q2FY09, with the BSE Capital Goods Index registering a gain of 8.6% as against a 0.8% decline in the Sensex.

After a lacklustre performance in May and June, the Capital Goods Index in the Index of Industrial Production (IIP) rose by 21.9% in July 2008 (vs a growth of 3.4% in May 2008 and of 8.3% in June 2008), thereby improving sentiment towards capital goods stocks.

We, however, hasten to add that such a strong performance is unlikely to be repeated in the coming months due to the very high base of the last year (a 30.8% growth in August 2007 and a 20.9% growth in September 2007).

In terms of order inflows during the second quarter, the signals were mixed. Companies like Larsen and Toubro (L&T) and Bharat Heavy Electricals Ltd (BHEL) continued to record a good growth in their order inflows during the quarter.

On the other hand, the order inflows for some of the mid-cap and small companies began to dry up in Q2FY2009. With the issues with Power Grid Corporation sorted out, the order bookings are likely to pick up in the coming quarters, especially in the transmission and distribution segment.

For most companies, the growth in the current year would continue to be driven by the existing strong order book position. However, a close watch needs to be kept on the order inflows, particularly that of the smaller companies.