Capital
Goods Stocks Outlook for the week (09 - 13.07.2012)
Stocks of capital goods and
engineering companies are likely to be rangebound with a negative bias for better
part of next week, in tandem with broader indices. There could be some
stock-specific action after the Central Statistics Office releases the
industrial production data for May on Thursday. The data will lend cues on the
Reserve Bank of India 's
future action on policy rates, which is also crucial for the capital goods and
engineering sector. With RBI choosing to tackle inflation first and deal
with insipid economic growth later and added with government's inaction to spur
investments, the fate of capital goods and engineering companies continues to
hang in the balance. Projects data from CMIE showed new investments are
being hurt by high interest rates, an uncertain macro environment along with
fuel and environmental issues. New projects have fallen 65% from the peak in
56.87 bln rupees in Oct-Dec 2010.
In our view, a sustained upturn
in the capex cycle is still not forthcoming; a softening in interest rates and
commodity prices, coupled with the resolution of fuel and environmental/land
issues would trigger the next capex cycle. Crompton Greaves and Larsen
& Toubro as preferred plays within the capital goods and infrastructure
space. Stocks of Crompton Greaves gained nearly 8.5% during the week on
plans to restructure its Belgium
operations to shift manufacturing from high cost Belgium
to low cost Hungary and Ireland . Partial
relocation of manufacturing to Hungary
can add 65 bps EBITDA of international ops by FY14. L&T, on the other
hand, is gaining strength due to strong order inflows and continued gain in
market stock. Our positive view on L&T is based on: 1) Continued
market stock gains domestically in a tough macro environment and 2) benefit in
overseas markets due to significant rupee depreciation. It, however, sees
limited headroom for upside potential following the recent rally in the stock.
