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Stocks of most capital goods and engineering companies are likely to trade in a range with a positive bias ahead of the Reserve Bank of India's mid-quarter monetary policy review, due Tuesday. Most economists are of the view that the RBI is not likely to change its key policy rates in this review. The capital market, and most stocks in the capital goods and engineering sector, may however remain upbeat as Chairman of the Prime Minister's Economic Advisory Council C. Rangarajan yesterday said he expects the RBI to cut interest rates at its third quarter policy review in January. The capital goods and engineering sector has been weighed down by high interest rates as higher costs have made funding difficult and projects have become unviable. Many clients are also deferring projects due to the high cost of finance.
But hopes of a cut in the repo rate in coming months rekindled as India's headline inflation rate based on the Wholesale Price Index fell to a 10-month low of 7.24% in November, data released by the commerce and industry ministry showed yesterday. While most of the industry is reeling under higher costs, which has led to depressed operating margins, Cummins India has decided to hike prices of some of its products to offset this impact. On Nov 29, the company decided to increase prices of its diesel generator and diesel engine sets by 3% from Jan 1. This is the second hike undertaken by Cummins India in this financial year. The price increases are done in a period when cost pressures, particularly commodity prices, have moderated. In our view, the twin trends of softening commodity prices and depreciation in INR (rupee) have improved margin outlook in the near term.
A cautious outlook on Larsen & Toubro due to slow-moving orders and continued margin pressure due to sustained inflation. In a report yesterday, the company stands to gain from the urea investment policy approved by the Cabinet on Thursday. The new policy seeks to give a minimum 12% post-tax return on capital to urea manufacturers who add new, expand or revamp old capacities. Fertiliser players are likely to start executing their expansion plans worth over 425 bln rupees. This, we believe, is a major positive for L&T. The added order flow will alter L&T's current order book mix, which has a higher proportion of pure construction jobs.
