Capital Goods Stocks Back In Action

In the past few trading sessions, Capital Goods stocks have witnessed a good amount of traction. Counters like L&T, ABB, Crompton Greaves, Voltas and Cummins India have outperformed the Sensex and other broader indices quite significantly in the past one month.

After remained subdued for a long time due to factors like higher interest costs, slower capex and higher commodity prices, what has changed suddenly for the counters to witness substantial northward movement? In fact, if we look at the Index of Industrial Production (IIP) number for September 2013, the Capital Goods segment contracted by 6.8% as against a contraction of just 2% in August 2013. These figures look more dismal against the 15.6% growth recorded in July 2013. The Capital Goods companies’ contribution to the September quarter GDP was also nothing to write home about. Then what could be the reason for the good run of these counters on the bourses.

The expected faster clearance of infrastructure projects is what seems to be driving the sector as a whole. What has also added to the optimism is the prospect of change in political leadership at the centre. As the BJP government is seen as pro-reform (which is likely to be beneficial for the Capital Goods companies as order inflows would increase), many on the street are taking up positions in the fairly cheap Capital Goods stocks. Note here that most of the companies from the segment saw a decline on the bourses in the past two years, as a result of which the stocks are available at fairly cheaper valuations.

In addition, orders have slowly but surely started to trickle into the books of the companies. While L&T witnessed a healthy increase in order intake in the September 2013 quarter, other companies like Voltas, Crompton and Thermax have also seen good amount of traction on the order book front.

The moot question is whether one should buy Capital Goods stocks at this level. We are of the opinion that those with a long-term investment horizon can enter the Capital Goods segment. Aside from Punj Lloyd and BHEL, the other large stocks in this sector are worth buying at the current levels. L&T, Thermax, Crompton Greaves and ABB still have upside potential.