Valuations of these scrips are below their historical averages, and with the investment cycle expected to pick up and consumption slowing down, analysts are increasingly recommending shares of capital-goods companies for the next five years.
“We see the capital-goods sector — especially L&T, Kalpataru Power, KEC and Polycab India — as good investment bets for next 3-5 years with strong order flows and improving execution cycle,” said Sanjeev Hota, head of research, Sharekhan by BNP Paribas.
“Expectations of a stable government at the helm for the next five years will accelerate the pace of investment capex in sectors such as infrastructure, construction, power transmission, roads and railways,” he added.
Currently, many capital goods stocks are trading much below their five-year averages valuations.
Stocks such as Siemens, ABB, Cumins India, Thermax, KEC InternationalNSE -3.72 % and Kalpataru Power are trading about 20-35% below their five-year average valuations.
In the past three years, Siemens and ABB have given a flat return of 3%, while Cummins India stock was down 17% against Nifty return of 29% in the period. Thermax and GE Power stocks rose about 30% in three years, while GE T&D India declined 33%.
Total investments in projects announced by companies in sectors such as steel, cement and power are already close to ₹20,000 crore and expected to be completed by FY22. Most managements are hopeful of a pick-up in ordering activity post general elections. But they continue to witness traction in ordering related to operating expenditure, which is related to automation/modernisation, balancing equipment, consumables and brown field expansion.
According to ABB, India is witnessing strong opex story with railways segment improving significantly, cement sector is coming out of the woods and steel is consolidating. Siemens is expecting strong interest in energy efficiency and productivity improvement. According to Themax, there is a string traction in chemicals and food-processing industry.
Kalpataru Power is positive on order flows in T&D from green corridor and expecting orders from international T&D, railways and pipelines. L&T sees major opportunities in roads, railways, water, defence, hydrocarbon, factory building for cement and metals.
“We believe that companies having global expertise in terms of geographies/applications, underutilised capacities in India and most importantly, strong balance sheets, like Kennametal India and ESAB India, are the ones that will benefit the most in the event of an investment upcycle,” said Salil Utagi, research analyst, Edelweiss.
Indian economy has been on a bumpy road in past 2-3 years due to external factors such as higher crude oil prices, rupee depreciation and global slowdown as a result of tariff wars.
A majority of the capital-goods players have grown at a single-digit CAGR in the past five years with stable or downward trending margins. Lack of ordering for large equipment has been the key factor behind slow growth, say analysts.