Capital Goods Stocks Outlook for the week: 07 - 11.01.2013

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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.

Capital Goods Stocks Outlook for the week: 31.12.2012 - 04.01.2013

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Stocks of most capital goods and engineering companies are seen trading with a negative bias next week. The segment is likely to witness stock-specific action next week. Rollovers to the January contract in the capital goods segment have been lesser than average, and thus indicate a bearish view on the sector. Larsen & Toubro particularly looks weak, while Siemens and ABB are likely to see some upside. Bharat Heavy Electricals also may face downside pressure, as analysts remain cautious over the company's stock. Orders received by BHEL so far in 1H13 (Apr-Sep) form only about 30% of our annual estimate, which provides downside risk to our order inflow estimates. Orders (are) already in place for certain capacity additions at NTPC up to FY20 (2020, Apr-Mar). Sporadic orders, if any, may still not help BHEL grow its order book over the medium term.

However, in the run up to the Reserve Bank of India's third quarter review of monetary policy on Jan 29, capital goods and engineering stocks may see some upside on hopes of a rate cut. The capital-intensive sector has been reeling under high finance cost that has made most projects unviable. Stocks of Suzlon Energy will remain in focus next week, as it has been reported that the company will meet its lenders later yesterday to discuss its debt restructuring plan. Companies manufacturing equipment in the transmission and distribution space look positive. Power Grid Corp of India is likely to award nearly 40% of its annual order target for investments in Jan-Mar. KEC International and Kalpataru Power Transmission stand to gain from such orders.

Capital Goods Stocks Outlook for the week: 24 - 28.12.2012

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Stocks of most capital goods and engineering companies are likely to trade in a thin range with a negative bias next week, mirroring the weak trend in the market. Trade is likely to remain choppy ahead of the expiry of the December futures contract, and as investors roll over positions to the January series. A grim outlook for the sector as fundamental issues like fuel linkages, funding, environmental and forest clearances, and land acquisition remain unresolved. Improvement in order inflow for the power sector is still not visible, with new project announcements in H1FY13 (Apr-Sep) contracting 57% YoY (year-on-year). With diminishing order inflow, working capital is likely to further deteriorate leading to declining margins and return ratios. In its mid-quarter policy review on Dec 18, the Reserve Bank of India kept its policy rates unchanged against industry-wide hopes of a rate cut in order to bring down the high finance costs, which are making clients defer their expansion plans.

Thermax Managing Director M.S. Unnikrishnan had said the RBI cannot delay cutting down interest rates beyond January. He said RBI should take a softer stance in its next policy review in January for investment to pick up. Espirito Santo Securities has advised investors to sell stocks of Thermax, Bharat Heavy Electricals, and BGR Energy Systems in the near term.

Capital Goods Stocks Outlook for the week (17 - 21.12.2012)

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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.

Capital Goods Stocks Outlook for the week (10-14.12.2012)

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Stocks of most capital goods and engineering companies are expected to gain further next week as the industrial production data for October may show a rebound, lifting the overall market sentiment. India's industrial production had unexpectedly contracted 0.4% in September led by the beleaguered capital goods sector. In August, the industrial output had grown 2.3%. Index of Industrial Production for October will be released on Wednesday, we expect to show a strong improvement over the year-ago period due to the statistical impact of a low base.

Fundamentally, the capital goods sector still remains subdued, but is expected to pick up going ahead. we believe that a cut in lending rates is imminent, as is finalisation of capacity addition by central and state utilities. We also expect clarity to emerge gradually on contentious issues like re-financing of SEB (state-electricity board) debt, coal allocation as well as re-negotiation of unviable IPP PPAs (independent power producers' power purchase agreements).

Capital Goods Stocks Outlook for the week (26-30.11.2012)

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Trade in shares of most capital goods and engineering companies is likely to remain choppy, as investors will roll over positions to the December derivatives series ahead of the expiry of the November futures contract. Action is likely to remain stock-specific aid.

Stocks of sector major Siemens Ltd are likely to remain in focus as the company announced its Jul-Sep earnings just minutes before Indian stock markets closed yesterday. Siemens posted a net loss of 557.7 mln rupees in Jul-Sep as compared with a net profit of 1.78 bln rupees a year ago. Siemen's performance was affected by a one-time loss of 1.20 bln rupees due to an impairment charge stemming from its decision to scrap setting up a wind energy machinery manufacturing unit.

Shares of Praj Industries are also likely to remain in focus after the Cabinet Committee on Economic Affairs approved mandatory 5% blending of ethanol in
petrol with effect from Dec 1. Currently, oil marketing companies use an average of about 2% blend. Sugar mills may need to expand ethanol manufacturing capacities to meet the additional demand arising out of the mandatory norm, which may result in new orders for Praj Industries.

Capital Goods Stocks Outlook for the week (19-23.11.2012)

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Stocks of most capital goods and engineering companies are likely to track the broad market, while investors may cherry-pick stocks based on valuations and company-specific news. Outlook on the sector continues to be grim as fundamental issues regarding land acquisition, high interest rates, environmental and forest clearances, paucity of orders, and aggressive competition, remain unresolved.

India's industrial output data for September was also disappointing, with capital goods sector contracting 12.2% against a 6.5% contraction during the same period a year ago, reflecting the investment slowdown in the sector. This was the seventh consecutive month that capital goods' output has contracted on a year on year basis.
 
Industrial production in September unexpectedly contracted 0.4% led by the beleaguered capital goods sector. Industrial output had grown 2.3% in August. Jul-Sep earnings will continue to drive movement in stocks. Stocks of Siemens will be in focus towards the end of next week as the company will detail its fourth-quarter results on Nov 23.

Capital Goods Stocks Outlook for the week (05-09.11.2012)

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 Stocks of most capital goods and engineering companies are likely to track the market in the absence of any sector-specific news. Shares of companies detailing Jul-Sep earnings will remain in focus.

Cummins India, Reliance Infrastructure, and Suzlon Energy are some of the larger engineering and construction companies that will detail their second quarter earnings in the coming week. Shares of Crompton Greaves are likely to slump as the company reported higher-than-estimated fall in consolidated net profit at 420.5 mln rupees. Jul-Sep earnings detailed by most capital goods and engineering companies so far show that their revenues have declined from the year-ago period due to slower execution of orders, tepid order inflows, while high interest rates and aggressive competition has weighed on their profitability.

Net profit of BGR Energy Systems, which detailed its earnings on Thursday, fell 32% year on year to 347.3 mln rupees as revenue slumped 18% during the quarter. Most of these companies are facing execution delays as clients have deferred their projects due to uncertainties over land acquisition, fuel linkages, high interest costs, environmental and forest clearances.

Capital Goods Stocks Outlook for the week (29.10.2012 - 02.11.2012)

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Next week, Stocks of most capital goods and engineering companies are likely to take cues from companies' Jul-Sep earnings and the Reserve Bank of India's policy review on Tuesday. Being capital-intensive in nature, the sector has been bearing the brunt of high interest rates, which have made projects financially unviable. Most market participants expect some growth-boosting measures from the RBI on Tuesday. Opinions are divided on a cut in the repo rate but some believe the central bank might slash banks' cash reserve ratio further. Repo rate is that at which the RBI lends to banks under its Liquidity Adjustment Facility. Specific stocks will react to companies' Jul-Sep earnings. Thermax, KEC International, and BGR Energy Systems are among the companies that will detail their quarterly performance next week.

Capital Goods Stocks Outlook for the week(22-26.10.2012)

Stocks of most capital goods and engineering companies are likely  to take cues from Larsen & Toubro's Jul-Sep earnings on Monday. One of the largest engineering and construction companies in India, L&T is seen posting a robust 17% growth in its net sales in the second quarter of the current financial year due to steady execution of orders. Net profit is also expected to show a modest 11% growth during the same period.

Investors will make a note of the management's comments on sales and order inflow growth target for 2012-13 (Apr-Mar) as it gives a fair idea of how the overall capital goods and engineering industry is faring. In May, L&T had guided for 15-20% growth in order inflows and revenue for the year ending March.

Any downward revision in guidance could hurt market sentiment and drag down some stocks in the capital goods and engineering segment. We expect 2QFY13 (Jul-Sep) revenue growth to moderate to 8% YoY (year-on-year) v/s 17% YoY in 1QFY13 (Apr-Jun), given the depleting order book and constrained environment. Ordering activity continues to be sluggish, particularly in the industrial and power generation segment.

We believe that besides L&T, companies such as Cummins India, Crompton Greaves, and KEC International are likely to do well in the Jul-Sep
quarter due to a large export base, and due to high tendering activity in the transmission and distribution space.

But others such as Bharat Heavy Electricals, BGR Energy Systems, and Siemens may post disappointing set of numbers due to high exposure to power
sector, which is reeling under structural issues such as lack of fuel linkages, land availability, and environmental clearances.

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Capital Goods Stocks Outlook for the week (08 - 12.10.2012)

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.

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Capital Goods Stocks Outlook for the week (01.10.2012 - 05.10.2012)

Stocks of most capital goods and engineering companies are likely to move in line with the market next week due to lack of sector-specific triggers. Post the recent gains, there could be profit booking in stocks of some companies in the sector. In the past three weeks, stocks of Larsen & Toubro, Bharat Heavy Electricals, and Thermax have raised 14-25% in anticipation of reforms by the government to boost the sector. The National Stock Exchange's 50-share Nifty rose around 6.3% in the period. Although the debt restructuring of state electricity boards is a step in the right direction, it would not be enough to resolve the problems of the power sector. The restructuring will improve the health of state electricity boards but may not lead to additional order inflow for transmission and distribution equipment manufacturers in the near term. State electricity boards are unlikely to take up any meaningful capital expenditure in the near term due to the financial restructuring.

The success of the restructuring would depend on states' willingness to accept the terms and conditions of the proposal. Due to the restructuring, state electricity boards are unlikely to give new orders for the next two-three quarters. Outlook on the power sector is likely to remain bearish until general elections in 2014 as no major reforms for the sector are expected before that.

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Capital Goods Stocks Outlook for the week (24-28.09.2012)

Stocks of most capital goods and engineering companies are seen trading with a positive bias next week, riding on the back of hopes that the government will announce some reforms for power sector. Power sector is one of the largest contributors to capital goods companies' order book. It has been widely reported in the media that the Cabinet would meet next week to discuss financial debt restructuring for debt-ridden state electricity boards.

Buoyed by hopes of reform measures, capital goods and engineering stocks ended up 3-8% on the National Stock Exchange yesterday. Bharat Heavy Electricals Ltd gained 7.5%, while Larsen & Toubro Ltd ended up over 4%. Larsen & Toubro Ltd yesterday hit a fresh 52-week high on the BSE's 50-scrip Sensex.

Bharat Heavy Electricals is likely to sail through safely without being majorly impacted by the ongoing coal mine controversy and subsequent review by the inter-ministerial group for coal block de-allocation.

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Capital Goods Stocks Outlook for the week: 17.09.2012 - 21.09.2012

Stocks of most capital goods and engineering companies are seen tracking the broad market next week, and will also take cues from the Reserve Bank of India's mid-quarter policy review that will be detailed Monday. Most shares in the segment are seen trading with a positive bias, in line with the Street.

Market participants do not expect the central bank to cut the repo rate, the rate at which it lends to commercial banks, but are looking forward to the
tone of its commentary.

The alleged coal block allocation scam may, however, weigh down select capital goods stocks if the Supreme Court de-allocates any coal blocks allotted to private power producers that have placed orders with power equipment manufacturers. For BHEL, orders of around 16,150 MW from nearly 16 private companies are at stake.

Most capital goods companies, facing stiff competition from overseas firms, were keenly eyeing imposition of the import duty. But exemptions made by the government are seen as a dampener. In a report dated Sep 12, Bank of America Merrill Lynch said Indian vendors such as L&T and BHEL have lost the opportunity to supply equipment for projects totalling 106,000 MW as these were approved before Jul 19.

The report also said orders worth 36,000 MW would also be lost for Indian equipment manufacturers due to the exemption on mega power projects coming up in the 12th five-year plan.

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Capital Goods Stocks Outlook: 10-14.09.2012

In line with the market, stocks of most capital goods and engineering companies are seen firm in the first few trading sessions of the coming week. Investors will eye India's Index of Industrial Production for July, data for which will be released Wednesday. The country's industrial growth had declined to (-)1.8% in June, mainly on account of 27.9% contraction in capital goods segment against a growth of 38.7% a year ago. Our analysis of BHEL's (Bharat Heavy Electricals) ordeook shows that orders totalling 4.5 GW and valued at 104 bln rupees could face delays oreven cancellation in a worst case scenario of de allocation of the coal locks. BHEL's earnings could decline by 65% in 2014-15 (Apr-Mar) from 2011-12 levels and the stock could move closer to 100 rupees if the Supreme Court de-allocates coal blocks from some of its customers. While maintaining underperforms rating on the stock, the brokerage has pegged the target price at 186 rupees.

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Capital Goods Stocks Outlook for the week (03.09.2012-07.09.2012)

Stocks of most capital goods and engineering companies are seen moving in a narrow range with a negative bias in the coming week amid lack of triggers. Lack of any positive cues in terms of order inflows, policy reforms and investment sentiment has been weighing on the sector for a while now. The impact of a sharp slowdown in the pace of investments is reflected in the ordering activity in the capital goods sector.

In a recent report, weak industrial demand and regulatory hurdles are impacting the capital goods sector's overall profitability. Sharp jump in working capital levels and interest costs are hurting the companies' margins. Ratings agency CRISIL said the working capital requirements of capital goods and engineering companies was at a five-year high due to inventory build-up and delay in payments. "We have either downgraded the ratings or revised the outlook to negative of 117 capital goods entities in 2011-12 (Apr-Mar). We believe that the revenue growth and profitability of capital goods entities will further slacken in 2012-13, resulting in sustained pressure on their credit quality," the rating agency said in a report.

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Capital Goods Stocks Outlook for the week (27-31.08.2012)

Stocks of most capital goods companies are expected to trade in a narrow band with a positive bias over the next five sessions amid lack of triggers. Weak business outlook for most companies in this sector continues to weigh on investor sentiment. Generally, across industrials managements body language and commentary remained weak on account of sustained deferrals and delays from clients across power equipment, oil and gas, metals, cement sectors. Weak industrial demand coupled with regulatory hurdles is impacting the sector's overall profitability.

Among the large companies, support for Larsen & Toubro is seen at 1,392 rupees, and resistance at 1,482 rupees. The stock has already rallied a lot and there has been some profit booking over the past four-five trading sessions,rall sentiment for the stock is positive. Bharat Heavy Electricals has been trading sideways for some sessions.

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Capital Goods Stocks Outlook for the week (21-24.08.2012)

Stocks of capital goods and engineering companies are likely to track the market next week, which seen moving in a tight range. With the earnings season over and not much of action happening, these counters are expected to move in tandem with the broad market. Traders see the National Stock Exchange's 50-scrip Nifty in the band of 5300-5450 next week, with low volumes due to subdued foreign investor participation.

Market participants said contraction of the capital goods sector as reflected in the latest industrial production data will continue to be an overhang on these stocks. India's industrial output contracted for the third time in four months in June, shrinking 1.8% in the month.

Traders see no near-term respite from the Reserve Bank of India through softening of interest rates, which will keep the pressure on capital goods and engineering companies. While fresh order flows have trickled down from most of the sectors, there has been active tendering for electrical equipment, especially reactors and transmission lines.

In the reactor segment, however, there is stiff competition from the Chinese players that poses risk to pricing and margins. Siemens India and Crompton have not won any orders in this segment from Power Grid in last four months.

We continue to prefer exposure to the transmission sector, as demand from both domestic and international markets is likely to remain robust. However, foreign competition continues unabated in the substation/equipment segment, posing continued risk to pricing and margins.

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Capital Goods Stocks Outlook for the week (13-17.08.2012)

Capital Goods Stocks Outlook for the week (13-17.08.2012)

Stocks of capital goods and engineering companies are likely to track the market, which is seen moving in a thin band. Apr-Jun earnings will guide stock-specific movement in the market. Siemens will be in focus Monday as the company posted dismal profit and sales numbers for the quarter ended June post market hours yesterday. The stocks are likely to open lower as operating margin slipped 700 basis points dragging the bottomline down 76%. Suzlon Energy is also likely to be in focus as the company will announce its first quarter earnings Monday. The wind turbine maker is seen posting a loss of 1.2 bln rupees due to high interest expenses.

Investors to sell BGR Energy System stocks following the company's Apr-Jun earnings, as the believe there are very few orders in the power equipment segment in which BGR operates. This in turn will put the company's margin under pressure. BGR Energy Systems target price to 306 rupees from 349 rupees as it expects the company to post a flattish performance in 2012-13 (Apr-Mar).

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Capital Goods Stocks Outlook for the week (06 - 10.08.2012)

Stocks of capital goods and engineering companies are likely to track the likely rangebound movement of the broad market next week. Apr-Jun earnings will guide stock-specific movement in the market. Blue-chip stocks, such as Larsen & Toubro Ltd, Bharat Heavy Electricals Ltd, and Siemens, may extend gains and see 2-3% upside in the coming week on value buying. Among the companies detailing their Apr-Jun earnings next week, ABB Ltd is seen posting 63% rise in net profit at 631 mln rupees on a low base and moderate 11% growth in net sales at 18.78 bln rupees. ABB will detail its earnings Wednesday. Siemens Ltd will also detail its quarterly earnings next week on Friday. Stocks of BGR Energy Systems are likely to be in focus in early trade Monday as the company posted lower-than-estimated net sales of 6.1 bln rupees and net profit of 336.6 mln rupees in Apr-Jun.

In mid-cap stocks, Cummins India given its strong, Street estimate-beating Apr-Jun revenue growth of 21.5%. The company's Apr-Jun bottomline expanded 43.6% on year due to robust sales and improved operational performance. Cummins Inc, the global parent of Cummins India, also posted a good set of Apr-Jun numbers. Cummins (Inc) continues to benefit from its geographic diversification and leadership position in a number of end markets.