Capital goods companies look up as the capex cycle turns

The BSE Capital Goods index has gained 19% year to date, outperforming the 7.9% gain of the benchmark Sensex. Even from the June low, the capital goods index has gained 38%, outperforming the Sensex’s 22% rebound.

Analysts said strong order inflows on the back of improving private capex cycle boosted confidence in the sector. Most of the project-based companies performed well and beat revenue estimates in the September quarter on the back of healthy order backlog and better realisations.

Sharekhan’s analysts estimate that their coverage universe experienced 18% revenue growth over the past year. Operating margin widened to 12.1% from 12% a year ago, despite rising input costs, especially for product makers. Net profit for their coverage universe grew 23% compared to a year ago and 38% sequentially. Analysts said the recent fall in prices of steel, base metals and other commodities would be margin positive for all companies in the coming quarters.

Credit Suisse analysts said in a recent report that data points from capital goods imports, Japanese Machine Tool Builders Association ordering and FDI suggest that the momentum is moderately positive and has room to strengthen further.

Emkay Global Financial Services data at the end of the second quarter suggested that companies such as Thermax, Triveni Engineering, Apar and ABB India saw double-digit order-book growth over the last three years. Government-led order inflow remains strong and could continue the momentum. Defense companies are already benefiting from the Make in India initiative. Larsen & Toubro Ltd has bagged a major order in the Bullet Train project. Arafat Syed, an analyst at Reliance Securities, said private capex is likely to add to the order book more quickly.

Analysts said private capex is rising across sectors. Chemical companies are exploring major expansion plans, and so are others in pharma, renewables, oil and gas, and defence.

Private sector capex announcements increase for eight months from November from 8.5 trillion 5.6 trillion during April-November FY20, according to Nirmal Bang Institutional Equities. This is up 35% from a year ago and 52% from pre-pandemic levels.

Analysts at Nirmal Bang said private sector capex announcements in FY23 are being led by the chemicals sector, which accounts for 45% of total projects by value, and another 35% of projects can be attributed to the renewable energy sector. Is.

The private capex pipeline in India is strong, driven by investment plans related to the energy transition, participation in PLI plans, and new technology sectors such as data centers (driven by 5G migration) and automated warehouses (driven by growth in e-commerce). said analysts at BOB Capital Markets Ltd.