Capital Goods Sector Report for the week (09 - 13.07.2012)

[rupeedesk]

Capital Goods Sector Report for the week (09 - 13.07.2012)

Stocks of capital goods and engineering companies are likely to be rangebound with a negative bias for better part of next week, in tandem with broader indices. There could be some stock-specific action after the Central Statistics Office releases the industrial production data for May on Thursday. The data will lend cues on the Reserve Bank of India's future action on policy rates, which is also crucial for the capital goods and engineering sector. With RBI choosing to tackle inflation first and deal with insipid economic growth later and added with government's inaction to spur investments, the fate of capital goods and engineering companies continues to hang in the balance. Projects data from CMIE showed new investments are being hurt by high interest rates, an uncertain macro environment along with fuel and environmental issues. New projects have fallen 65% from the peak in 56.87 bln rupees in Oct-Dec 2010.

In our view, a sustained upturn in the capex cycle is still not forthcoming; a softening in interest rates and commodity prices, coupled with the resolution of fuel and environmental/land issues would trigger the next capex cycle. Crompton Greaves and Larsen & Toubro as preferred plays within the capital goods and infrastructure space. Stocks of Crompton Greaves gained nearly 8.5% during the week on plans to restructure its Belgium operations to shift manufacturing from high cost Belgium to low cost Hungary and Ireland. Partial relocation of manufacturing to Hungary can add 65 bps EBITDA of international ops by FY14. L&T, on the other hand, is gaining strength due to strong order inflows and continued gain in market stock. Our positive view on L&T is based on: 1) Continued market stock gains domestically in a tough macro environment and 2) benefit in overseas markets due to significant rupee depreciation. It, however, sees limited headroom for upside potential following the recent rally in the stock.

By RUPEE DESK

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