Outlook for capital goods industries remain bleak in Q4

The entire capital goods segment has been in the eye of the storm in the recent times owing to fears of overstretched valuation, slowdown in order execution and increasing margin pressure due to rising input costs, Sharekhan, one of the leading broking houses in India said. Consequently, the sector has underperformed the broader market, with the BSE Capital Goods Index correcting by 29.1% in the last quarter as compared with a 22.9% correction in the Sensex, it added.

High raw material cost is likely to exert greater pressure on the margins of all the capital goods companies, as they would find it difficult to pass on the entire impact to customers. This combined with slower order execution has led to a sector de-rating. In line with this, Sharekhan has downgraded the valuation multiples and consequently the price targets for some of the companies under its coverage.

Though there has been a slowdown of sorts in order execution lately, but Sharekhan thinks the same is a medium-term phenomenon. It maintains the bullish outlook on the overall sector considering the high infrastructure spending and the continuous rise in the industrial capital expenditure. Consequently, it expects the order inflows to remain strong in the times to come. As it is, the bulk of the companies under its coverage are currently sitting on order books that are at record levels. This imparts strong visibility to their future earnings, the broking house said.

Considering the buoyancy, Sharekhan strongly believes the existing valuations of the capital goods companies are extremely attractive. At the current levels, the sector seems to be oversold. Therefore the broking house advises investors to use the current gloom as an opportunity to buy and build positions in fundamentally strong companies.

``We expect slower order execution and higher input cost to affect the Q4FY2008 performance. We expect our capital goods universe to report a top line growth of 20.5% and a bottom line growth of 5.7% for Q4FY2008``, the broking house said.

Sharekhan`s capital goods universe includes Bharat Bijlee, BHEL, Crompton Greaves, Genus Overseas, Indotech, International Combustion, KEI Industries, KSB Pumps, Larsen & Toubro, Punj Lloyd, Ratnamani Metals, Sanghvi Movers, Thermax and WS Industries.