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Stocks of most capital goods and engineering companies are likely to decline next week due to profit booking amid lack of any sector-specific triggers. Sentiment in the market will also dictate the trend in stocks of these companies. Action in the capital goods sector is likely to remain stock-specific. Valuations of stocks of most capital goods companies are running ahead of fundamentals. Even if the Reserve Bank of India cuts the repo rate in its policy review on Jan 29, there is little scope for an upside in these stocks as valuations are stretched. Several stocks have seen sharp up-moves and are pricing in a sharp and sustained recovery ahead. If the recovery happens as expected, the upside to the stocks will be limited, in our view, while any disappointment could result in sharp downside for stocks with high expectations. However, see stocks of some capital goods companies rising in the run-up to the RBI policy review. The central bank is expected to slash the repo rate by at least 25 basis points. This will encourage banks to lower their lending rates, which will help the capital-intensive capital goods and engineering sector.
High interest rates have been hurting the sector for a while now. The clients of companies in the sector have been deferring plans as most projects have become financially unviable. New project announcement have declined 36% YoY (year-on-year) in FY12 (2012-13 Apr-Mar) and 54% YoY in 9MFY13 (Apr-Dec 2012). This point to a severe contraction in capex (capital expenditure) over the next two-three years. We expects stocks of Crompton Greaves to buck the trend in the sector as the current price of the stock factors in all the headwinds the company has been facing lately.
Stocks of most capital goods and engineering companies are likely to decline next week due to profit booking amid lack of any sector-specific triggers. Sentiment in the market will also dictate the trend in stocks of these companies. Action in the capital goods sector is likely to remain stock-specific. Valuations of stocks of most capital goods companies are running ahead of fundamentals. Even if the Reserve Bank of India cuts the repo rate in its policy review on Jan 29, there is little scope for an upside in these stocks as valuations are stretched. Several stocks have seen sharp up-moves and are pricing in a sharp and sustained recovery ahead. If the recovery happens as expected, the upside to the stocks will be limited, in our view, while any disappointment could result in sharp downside for stocks with high expectations. However, see stocks of some capital goods companies rising in the run-up to the RBI policy review. The central bank is expected to slash the repo rate by at least 25 basis points. This will encourage banks to lower their lending rates, which will help the capital-intensive capital goods and engineering sector.
High interest rates have been hurting the sector for a while now. The clients of companies in the sector have been deferring plans as most projects have become financially unviable. New project announcement have declined 36% YoY (year-on-year) in FY12 (2012-13 Apr-Mar) and 54% YoY in 9MFY13 (Apr-Dec 2012). This point to a severe contraction in capex (capital expenditure) over the next two-three years. We expects stocks of Crompton Greaves to buck the trend in the sector as the current price of the stock factors in all the headwinds the company has been facing lately.
