CAPITAL GOODS – ARE THEY GOOD TO BUY?

By Ruma Dubey

IIP numbers for past few months, despite the demonetization was good. January IIP looked good at 2.7% - the lower base effect as well as the bounce back in the capital good sector is what helped boost the IIP.

In fact capital goods has been showing good improvement – for January it came in at 10.7% v/s -21.6% (YoY), which clearly shows that things are slowly but surely showing improvement.

Even on the bourses, select capital good stocks have been showing an improvement. BHEL, BEML, Greaves Cotton, VA Tech Wabag, L&T, ABB India, Thermax, SKF India, AIA Engineering – these are some of the stock which have been garnering a lot of attention.

Now the moot question - is the capital goods sector bouncing back? Well, the IIP numbers do give the good feeling 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. L&T has been showing an order intake almost every single day. Today also, it announced Rs,5250 crore order from Qatar, its single largest order. L&T Construction won orders worth Rs.1725 crore while L&T Hydrocarbon has won orders to the tune of Rs.4000 crore. Its residential wing too won orders worth Rs.2900 crore.

BHEL has been busy this past fortnight, commissioning quite a few thermal power projects, including the largest power plant in NE and a lignite based power plant in Gujarat. BEML also recently announced that it had received  Rs.1421 crore order from BMRCL. It is not like the order intakes have percolated down to the small and midcap companies though. What we see is huge orders coming for the bigger and ‘usual suspects.’

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. Though the 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.

Yes, there is no denying the fact that order intake has gone up and FY18 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 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…..