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Stocks of capital goods and engineering companies are seen trading in a thin band next week as weak industrial production figure for November is likely to keep sentiment subdued for the sector. According to the figure released by the Central Statistics Office yesterday, India's factory output contracted 0.1% on year in November, compared with 8.3% growth a month ago.India's capital goods output fell 7.7% in November, compared with a growth of 7.5% in October.
For the past two years, the sector has suffered the adverse effects of policy inaction, high inflation and rising interest rates. However, we believe that reforms from the government to revive the slowdown in the sector coupled with hopes of easing monetary policy from the Reserve Bank of India could reverse the outlook for the sector.
The RBI will detail its third quarter monetary policy review on Jan 29 and most market participants expect the central bank to cut the repo rate. Investors will pick up stocks (of capital goods companies) which will be quick to absorb the revival trend. Companies with diversified business areas and diversified clientele will be first to show positive signs of revival. Larsen and Toubro, Cummins India and KEC International are a few stocks, which may see some positive activity in the coming weeks on account of strong fundamentals.
