Stocks of most capital goods and engineering companies are likely to track the market next week in the absence of sector-specific triggers. Though most stocks in the sector have rallied in the past one month on anticipation of reforms for the ailing power sector. Fundamentally nothing has changed for the capital goods industry, which is reeling under low order inflow, aggressive competition, and high interest rates. We expect the (capital goods) sector to continue with its subdued performance. New order inflows, key growth driver for the industry, have remained weak. Project deferral, execution slippage and declining order book are expected to suppress revenue growth, while high interest rates as well as input costs are likely to keep margins under pressure.
The BSE Capital Goods Index has risen over 18% in the past one month as against the 9% rise seen in the BSE's 30-stock Sensex during the same period. In the past three weeks, the BHEL (Bharat Heavy Electricals) stock rallied 30% after the government announced multiple reforms to kick-start economic growth. In the absence of a change in BHEL's fundamentals and specific reforms to bail out the struggling power sector, this rally only reflects investor optimism that the government could initiate more reforms, given its new found zeal.
