According to analysts, capital goods companies are likely to see a 20-22% growth in revenues. This is encouraging, given that the sector registered a 3.5% growth in the third quarter.

Graphic: Yogesh Kumar/Mint

Besides, most companies are likely to retain the third quarter operating profit margin of 15-17%.

Despite these positives, the BSE Capital Goods Index registered a negative return of 0.3% during the March quarter, when the BSE Sensex returned around 0.4%. That’s probably because the sector had already run up at a much faster pace in earlier months following the elections, when the commitment to infrastructure growth was assured. And at the current market prices, valuations are rich. In most cases, fiscal 2011 earnings are already discounted at least 22 times, leaving little room for appreciation.

How about the outlook for 2010-11? According to Mumbai-based Edelweiss Securities Ltd, “We believe given the pace of recovery in the economy, order inflows in FY11E could surprise on the upside. However, margins for FY11E may remain under pressure, as orders taken in FY09 reach the execution stage."

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