Capital goods stocks rally on investment cycle revival hopes, outperform BSE Sensex

Nov 29 2013, 15:41 IST
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The capital goods index has surged another 4% The capital goods index has surged another 4%
SummaryBSE Capital Goods Index gained 36.12% to outperform the BSE Sensex.

Capital goods stocks seemed to have regained investors’ interest with market participants expecting the investment cycle to revive after elections.

In the last three months, the BSE Capital Goods Index gained 36.12% to outperform the BSE Sensex, which has gained only 10.29%.

While the BSE Sensex made a new high on November 3, the index has corrected 3.16% since then.

On the other hand, the capital goods index has surged another 4%. However, in year-to-date period, the capital goods index slipped 11.26% against BSE Sensex’s upmove of 5.7%.

Experts feel while there is not much pick-up in activity at the current juncture, investors are banking on a business-friendly government post elections.

“Projects are still stuck and interest rates are still high. However, investors are closely monitoring elections for a favourable outcome. Apart from this, managements of most capital goods firms have hinted at better earnings visibility going ahead,” said Sanjeev Zarbade, vice-president (PCG), Kotak Securities.

The capital goods firms, however, reported mixed set of numbers for quarter ended September. Engineering major Larsen & Toubro (L&T) reported a y-o-y fall of 14% in profit, but exceeded analysts’ expectations with revenue growth of 10%.

Meanwhile, Bharat Heavy Electricals Ltd (BHEL) reported 64% y-o-y fall in earnings at R456 crore.

“Fundamentals continue to remain weak for the sector,” added Chirag Shah, capital goods analyst, ICICI Securities.

Among the bigger names, L&T has gained 41.70% since September. The government-owned BHEL has clocked gains of 32.09%. Thermax is up 19.52%, while Crompton Greaves has surged 53.89%.

Market observers feel cyclicals are poised to see a rally in the next year. “If you take out IT, consumer and pharma, the markets are trading at p/e multiple of 11-times. So, 60-70% of market is undervalued. We are moving towards industrials, materials, utilities and autos from defensives,” said Andrew Holland, CEO, Ambit Investment Advisors.

On Thursday, among the 13 sectoral indices, capital goods index gained the most at 1.74%. Among the index stocks, L&T gained 1.67% to close at R1023.40, BHEL was 3.04% up at R150.85, Crompton Greaves closed at R124.65 or 4.14% higher and Thermax was up 1.08% to close at R645.35. While not listed in the index, shares of Mumbai-based company Voltas surged 12.42% before closing at R111.35.

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