By Ruma Dubey

The Q2FY14 GDP numbers were not bad. No, its not yet time to beat the victory drums and shout from rooftops but there is some hope. The market too has taken cognizance of this fact and a small sense of optimism, like a mild halo, surrounds the investors. The GDP is driven largely by exports but with a good monsoon gone by and promise of a better rabi crop, the hope is that agriculture along with manufacturing will drive growth.

This maybe a new found sense of optimism but have taken a look lately at the capital goods sector?  The sector is in the green while others like banking, PSU, Healthcare and FMCG are trending in the red. Of the 20 stocks in the sector, 14 are in the green, led by BHEL, Thermax, ABB, Crompton. L&T on the other hand has some profit taking.

But the moot question is – is the capital goods sector bouncing back? Well, the IIP numbers do not yet give this indication. For Septemer’13, capital goods showed a degrowth of 6.8%, up from a degrowth of 2% in August. July was an aberration as it saw a 15.6% growth. But YoY, degrowth of 6.8% in Sept’13 is much better than the degrowth of 1.3.3% in Sept’12. So MoM , we have not seen an improvement yet but YoY, surely things are better though not yet out-of-the-woods.  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.

If one then decides to overlook IIP, look at the Q2 numbers posted by most. L&T posted a much better-than-expected set of numbers but more than trhe numbers, the market was enthused with the management guidance, wherein it has maintained that it will be able to meet the target of 20% order inflow and 15% revenue guidance for FY14. Following this, many brokerage houses have upped their price target and put a “buy” call on this stock. Siemens ended FY13 on a much lower note but it had shown a 35% uptick in order intake in Q4 ended 30^th Sept 2013. Thermax ended Q2Fy14 with a 67% (YoY) decline in net profit but on 26^th Nov, it announced having received a Rs.269 crore order. Electric equipment maker Crompton Greaves reported a 23% rise in Q2FY14 net profit. Though it has not made any major order receipt announcement, the stock today hit a new 52-week high. BHEL is in the green today but its Q2 numbers were very disappointing. With BHEL, the peculiarity is that its fortunes are inextricably linked with that of the power sector and till we do not see a bounce back there, BHEL will have some tough times.

And then look at the order intake of many capital goods company. Off late, we have seen many of these companies state having received orders, something which was missing for some time. Like Voltas; the company did not have a very good Q2, numbers were muted but since then things have looked up. Last week, the company announced having bagged Rs.1000 crore worth of orders from the Middle East. The first project is for a 120-bed integrated health centre and workers' hospital in Qatar; the second is for building a sports hall and administrative office in a 5,350-seat indoor stadium being built to host the World Cup Handball Competition scheduled for January 2015 in Qatar and the third project is for a 5-Star hotel - Kempinski Wave in Muscat. The company has stated that things are looking up on its international order book as the Middle Eastern countries are getting ready to commit substantial funds for new construction, especially in infrastructure. Also with Dubai winning Expo 2020, more orders to Indian companies are expected to come in.

Today, L&T Construction announced having received a Rs.1471 crore order and on 7^th Nov, it stated having received Rs.2309 crore worth of orders. L&T IDPL received a Rs.1293 crore road project order in Odisha on 12^th Nov.

Thus there is no denying the fact that capital goods stocks are back on the “buy” radar. The 2.5 times subscription of Alstom T&D’s institutional placement is a pointer to the same. 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 post the Lok Sabha elections next year, once a stable Govt is in place, there will be major infra spend and that is expected to kick start growth. At the same time, 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 new low 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…..