So the monsoons are upon us, but one sector that will not be really looking forward to the rainfalls will be the Capital Goods sector. This is the latest woe in a series of woes like the sluggish economy that has bedevilled the sector.
And, even worse, the light at the end of the tunnel i.e. a recovery seems to be quite some time in the future. “Unfortunately, the Capital Goods sector is under significant pressure and the pressure is expected to continue over the next few months,” says Sudip Bandyopadhyay MD & CEO Destimoney Securities.
The monsoons are upon us and this year the MET has predicted that quantitatively, monsoon season rainfall is likely to be 99% of the LPA with a model error of ± 5%. “Monsoons slow down industry and infrastructure activities in particular, and this year is expected to be no exception,” continues Bandyopadhyay.
And then of course is the overhang of the generally negative economic scenario across India per se. “Weakness in macro environment was clearly visible in the order inflow number for the sector,” says Kunal Sheth and Riddhi Kothari of Prabhudas Lilladher. Thus, order inflow for the sector was down by 37% YoY to Rs 40,800 crore (Rs 408 billion) in the Q4 FY12 period.
The reasons for the pressures on the Capital Goods sector would include high interest rates, policy inaction land and environmental clearance issues, and tight liquidity.
A slowdown in the economy and problems in this sector have made banks wary of lending to this sector. “Apart from that, even promoters and the managements of companies in this sector are also reluctant to borrow and expand considering the overall economic environment,” says Bandyopadhyay.
Order inflow has significantly slowed down in this segment. Both public and private sectors flow is down. “While policy paralysis at the government level is responsible for slowing down the government order flows, the overall economic slowdown has reduced private sector order flows,” explains Bandyopadhyay.
And the issue is that the Capital Goods sector does have a lot going for it.
“Slump in the GDP growth rate has raised expectations of further cut in interest rates in the coming monetary policy. This, as is widely expected to happen, will be a shot in the arm for the capital goods sector as interest rates for the sector will go down,” says Dr. VK Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services.
“We do not see that there would be any finance problems for the sector as the outlook remains positive in the long term,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global.
And in an irony of sorts the rupee depreciation will benefit the sector. “Rupee depreciation will have a positive impact on capital goods since it leads to import substitution benefiting domestic capital goods industry,” says Vijayakumar.
“Chinese and other cheap imports have been a bane for this sector for a long time,” says Bandyopadhyay.
Capital Good’s stocks and the investor
“It will be a bit too early for retail investors to bet big on this industry. However, there are safe bets like an L& T,” says Dr. VK Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services.
“For short and mid-term point of view, retail investors should avoid this sector,” says Sudip Bandyopadhyay MD & CEO Destimoney Securities. “Long term investors can selectively start buying stocks in this sector with value appreciation opportunities in one year plus time horizon,” he continues.
“We are positive for the capital goods stocks for the long term given the importance that infrastructure is expected to get,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. “However, in the short-term we are sceptical for the stocks due to the uncertainity in the market and currency fluctuations. We believe that one can hold the stocks for better returns in the long term,” he continues.