Capital goods cos look up as capex cycle turns

Market


New Delhi: Shares of capital goods companies have widely outperformed the benchmark Sensex, as a revival in the capex cycle has driven an increase in order flows to capital goods companies.

The BSE Capital Goods index has gained 19% year to date, beating the benchmark Sensex’s 7.9% increase. Even from the June lows, the capital goods index has gained 38%, outperforming the Sensex’s 22% rebound.

Strong order flows as the private capex cycle improved have boosted confidence in the sector, analysts said. Most project-based companies performed well and surpassed estimates on revenue in the September quarter because of a healthy order backlog and better realizations.

Sharekhan analysts estimate that their coverage universe experienced 18% revenue growth over the previous year. Despite rising input costs, especially for product manufacturers, the operating margins at 12.1% widened from 12% a year ago. Net profit for their coverage universe rose by 23% from a year earlier and 38% sequentially. The recent correction in prices of steel, base metals and other commodities would be positive for all companies from a margin perspective in the coming quarters, analysts said.

Data points from capital goods imports, Japanese machine tool builder association ordering, and FDI suggests that the momentum is modestly positive and has room for strengthening further, said analysts at Credit Suisse in a recent report.

Emkay Global Financial Services data at the end of Q2 suggested that companies such as Thermax, Triveni Engineering, Apar, and ABB India have witnessed double-digit order-book growth over the past three years. The government-led order flows remain strong and may continue driving momentum. Companies in the defence space are already benefiting from the Make in India initiative. Larsen & Toubro Ltd has secured a large order in the bullet train project. Arafat Saiyed, an analyst at Reliance Securities, said a further pickup in the private capex is likely to add to the order book.

Private capex is picking up across sectors, analysts said. Chemical companies are exploring major expansion plans, and so are others in pharma, renewables, oil and gas, and defence.

Private sector capex announcements for the eight months to November rose to 8.5 trillion from 5.6 trillion during April-November FY20, according to Nirmal Bang Institutional Equities. It is up by 35% from a year earlier and 52% above the pre-pandemic level.

Private sector capex announcements in FY23 are being led by the Chemicals sector, accounting for 45% of total projects by value, and another 35% of projects by value can be attributed to the Renewable Energy sector, analysts at Nirmal Bang said.

The private capex pipeline in India is robust, fuelled by investment plans related to the energy transition, participation in PLI schemes, and new technology areas such as data centres (driven by 5G migration) and automated warehouses (driven by growth in e-commerce), analysts at BOB Capital markets Ltd said.


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