Capital goods index up; analysts bet on rising order flows, increasing govt spend

With key equity benchmark indices staging a smart recovery in early Wednesday trade after the recent slump, investors appear to be more upbeat in the capital goods space betting on hopes the surging order book position and the government’s increasing spend in the sector going ahead would spur earnings growth over the next few years. Outperforming other key indices, the BSE Capital Goods index was the lead gainer in the sectoral pack, rising 2.3 percent to 16,995.84 as against 1 percent rise in benchmark Sensex at 26,746.16. Among the gainers, BHEL rose 3.2 percent to Rs 249.05, BEML gained 2.8 percent to Rs 1,246.50, L&T moved up 2.6 percent to Rs 1,711.10 and Siemens was up 1.2 percent at Rs 1,331.60. [caption id=“attachment_2288304” align=“alignleft” width=“380”]  Reuters[/caption] Analysts reckon order inflows for the sector has risen over 11 percent year-on-year to Rs 71,400 crore, and the government taking right steps will have a positive impact which would be visible over a period of time. According to a Prabhudas Lilladher report, large project finalisation is taking time and they expect pick-up to happen over the next 2-4 quarters. The report also suggests that markets for power BTG/power T&D, renewable, railways, rods, genset was positive for the year ahead. Foreign brokerage Morgan Stanley has also indicated that investment cycle could have already begun, and hence expect 18 percent earnings growth for the broader market. The brokerage also believes that engineering orders has been gaining pace and sees a rise in investment proposals going ahead. As per the CMIE data, new investment announcements continued to show positive trends for three consecutive quarters, indicating signs of reviving confidence. Announcement of new projects in the March 2015 quarter witnessed a significant rise in private sector participation. Its share in total new investment announcements rose to 75% from 46% in the earlier two quarters, as per the data. Although, aggregate sales of capital goods companies during the March quarter was down 5 percent on year to Rs 52,800 crore, showing de-growth for eight consecutive quarters, analysts expect improving order book position and outlook on the same would help reverse earnings fortunes over the next 1-2 quarters. “We expect the earnings for sector to grow by 25% in FY16 (on low base and four years of weak earnings) and 22% in FY17E,” said a Prabhudas Lilladher report.