Capital good stocks have outperformed broader markets by the wide margin during the past year. In fact, just four of the 24 stocks in the BSE Capital Goods bucket have returned losses. During this period, the benchmark Sensex has returned 6.28%, while the Capital Goods index has returned 31.24%.
The government’s push towards infra spend, for starters, is the major trigger, say market players.
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A push towards localisation in terms of manufacturing, coupled with indigenisation in the defence sector, has also been a key trigger, he added.
Capital goods also seems to be a sweet spot with regards to foreign institutional investors (FIIs).
Sample this: Since May 2022 up to the first fortnight of April 2023, FIIs have infused over Rs 17,000 crore into the sector, shows data by primeinfobase. During this timeline, January was the only month in which FIIs were net sellers in the capital goods sector — withdrawing Rs 86 crore.
This is in stark contrast to the Rs 7,592 crore in net outflows by foreign investors on an overall basis during the same period.
“Infra was the key area of focus in the Union Budget, and the government pushed ahead with its growth agenda despite 2024 being the election year. The outlook remains strong for the sector, and FII interest will remain high as project execution will remain on track,” said Chandan Taparia, head (Technical & Derivatives Research), Motilal Oswal.
What stands out for the sector, say analysts, is the earnings visibility for companies. According to them, heavy order inflows and rapid execution of projects have made sentiment strong in their favour. The best performers have been those with either low or no debt on their books.
As of FY22 financials, Hindustan Aeronautics, Siemens and ABB had no debt on their books, CG Power had a debt of Rs 307 crore and BHEL was leveraged to the extent of Rs 475 crore.
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These were the top five stocks in terms of one-year returns. Three of them returned over 50% to investors — HAL 73%, CG Power 63%, and ABB 59%. BHEL and Siemens showed returns of 49% and 47%, respectively.
“Our Capital Goods universe is expected to post 15/24/22% y-o-y growth in revenue/Ebitda/PAT for Q4FY23. Short-cycle portfolios logged record operating profit margins (OPMs) in Q3, benefiting from the correction in key commodity prices, better mix and operating leverage. We expect 2-3% moderation in sequential OPMs with respect to gain in commodity prices. Inflows are expected to grow 20% y-o-y (45% sequential), driven by large project awards in rail PPP (to SIEM) and a bunch-up in the defence sector,” said Renu Baid, vice-president (Research), IIFL Securities.
She added that CG Power, KKC, and MTAR will be the top three in terms of earnings growth, while KEC will trail peers despite higher sequential OPMs.