GOLDEN RULES FOR TRADING

Capital Goods Stocks Outlook for the week - 25 to 29.11.2013

www.rupeedesk.in

Stocks of most capital goods and engineering companies are seen down next week with no uptick in investment cycle visible in sight, and as margins remain under pressure. The market is subdued and margins are under pressure, so overall the sector stocks will be rangebound, barring a few companies. Investors are positive on Siemens Ltd on better-than-expected net profit in Jul-Sep. The power equipment and capital goods maker posted net profit of 1.49 bln rupees in Jul-Sep, significantly higher than estimates of 432 mln rupees, on the back of lower raw material cost and exceptional gain of 523.2 mln rupees. Last year, the company posted a net loss of 557.7 mln rupees. Siemens' new orders were up 35% on-quarter in Jul-Sep, which is expected to boost sentiment around the company's stock next week. 

Investors are also bearish on stocks of Crompton Greaves Ltd, as the company is showing traces of a turnaround with an increase in order inflow. The market is also positive on the company's European operation, which was restructured last financial year. Apart from these two stocks, stocks in the segment are not expected to perform well as projects and investment in the power sector continues to move at a snails' pace due to global economic slowdown and policy uncertainties. The movement of capital goods stocks depends highly on performance of independent power producers. Even if the order cycle picks up from the sector, the industry will face structural challenges owing to oversupply.

Even stocks of sector bellwether Larsen and Toubro Ltd are expected to be subdued. An increase in the proportion of slow moving orders in backlog, unforeseen cost provisions in large overseas orders booked by L&T are key downside risks for the company. The company's net working capital as a proportion of sales has also deteriorated. L&T's net working capital appreciated to 18.2% as on Sep 30 from 16.5% last year. The pricing power in the sector is unlikely to improve in the near-term as more companies chase less number of orders.