CAPITAL GOODS - TIME TO BUILD ON THE STOCKS?

By Ruma Dubey

The numbers of the past few months for IIP have been uncomfortable and within those numbers, Capital Goods have progressed pretty slovenly. Aug Capital goods number came in at a negative 11.3%, worse than a degrowth of 3.8% in July. The number in June was suspiciously very good at 23%, while May was low at 4.5% and April had once again been very good at 15.7% growth.

So if one can see, beginning this fiscal, two months recently saw negative growth while the rest were positive but with wild swings. And now there is news, a report put out by Business Standard that around 17 companies received a combined fresh orders amounting to Rs 28,170 crore from the state and the central government during the past month, September.

The data showed that of this Rs.28.170 crore, the maximum orders went to the Capital Goods sector, clocking in Rs.23,448 crore or 83% of the total order. The balance 16% was distributed between oil and gas sector (4%) and construction (12%).  The data also goes on to show that sequentially, between Q2FY15 and Q1FY15, the growth in orders was at a healthy 45% though YoY, Q2 in current fiscal showed a 3% drop.

Yesterday, the entire market ended in the green and almost all sectors were up thus it was not out-of-the-ordinary to see Capital Goods index clocking a gain, led by big weights like L&T, Thermax, BHEL, Crompton Greaves, Havells, Suzlon, Siemens, Pipavav, ABB, SKF, Alstom and many more. Today too, the capital goods index is up around 4% currently and out of the 18 stocks in the sector, 14 were in the green.

Now the moot question - is the capital goods sector bouncing back? Well, the IIP numbers do not yet give this indication. But many analysts do not take into consideration capital goods in the IIP at all as it simply cannot be trusted given the lumpy basket of goods it comprises of. And past trends have shown that, the capital goods sector oscillates wildly, is very volatile.

Based purely on order intake, surely a lot is happening on the grounds. Yesterday, Thermax announced receiving Rs.321 order from a captive power plant in Africa. Two days ago, BHEL won 444 MW Hydro Electric Project in Uttarakhand. Early October, L&T Construction won Rs.1630 crore Expressway Project in UP. In September, L&T Construction won orders totalling Rs.1423 crore while L&T Metallurgical won orders worth Rs.2030 crore in current Q2. BHEL has been receiving new orders consistently and its order tally last month was to the tune of over Rs.12,000 crore. and Crompton Greaves Q2 performance was much below analyst expectations. The rest are yet to declare their numbers but we should most of them in the next one week.

Thus there is no denying the fact that capital goods stocks are back on the “buy” radar. But mind you, the sector is not yet out-of-the woods as mentioned earlier. The current fancy for the sector is based on pure assumption that with the process of economic revival round the corner, power sector expected to get a priority, this sector will bounce back the fastest. In fact at the beginning of this month, rating agency, CRISIL put out a report stating that investment linked sectors like construction and capital goods will continue to perform poorly in Q2 and in FY15 as the pace of project execution continues to remain patchy. But at the same time, it expects cement and steel to buck the trend and do much better, mainly on account of lower base effect.

Thus concern remains because mere clocking an order in the books is not enough; the money actually comes in when order is executed. And that is where the problem lies.

But at the same time, things are changing slowly on the ground.  One needs to look at growth impetus being given by the Govt to the power sector where intra State transmission projects and substation automations will lead the show. The planned dedicated freight corridors are also expected to bring in a lot of moolah for the sector as some $7.5 billion worth orders are expected to be awarded in civil and electrical works. This is expected to come in by FY16.

Yes, there is no denying the fact that order intake has gone up and H2 looks much better. Does that mean that one should buy into this sector now? For a long term investor, any dip in a stock like L&T is a buy signal. Accumulate at every fall, keeping a horizon of at least 3 to 5 years. One can avoid Punj Lloyd and BHEL for now but Thermax and Voltas looks good – only from long term. The sector is a bit on the expensive side right now so wait for dips. Once the economy bounces back, this is one sector which will zoom up first like a rocket. If only the economy bounces back with vigor…..