Capital Goods Stocks Outlook for the week – 14 to 18.09.2015 (Seen in range with positive bias)

Capital Goods Stocks Outlook for the week – 14 to 18.09.2015
(Seen in range with positive bias) )

Stocks of most capital goods companies are seen trading rangebound with a positive bias next week on favourable industrial production data for the sector in July. According to information released by the Central Statistics Office yesterday, after market hours, the overall industrial growth for India in July stood at 4.2% as compared to 4.4% in June and 0.9% in the previous year.

However, given the high valuation of most stocks in the sector the surge in stock prices will have
limited headroom. We note that despite a 19% correction in the (capital goods) sector valuations in 1 month, we remain negative on most stocks under our coverage given their expensive valuations.

We also expect the positive economic data to have a short-lived impact on the shares of capital
goods companies. With key reforms such as land bill and goods and services tax being held up, the sector is unlikely to see any significant gains.

Shares of state-owned power equipment maker Bharat Heavy Electricals and Thermax, however, are seen weak going ahead owing to company specific issues. Most of the recent gains in Thermax have been on account of execution of one very large order from Reliance Industries. With this order now close to completion, the earnings may weaken going ahead as the order inflows for Thermax from core sectors such as cement and steel are yet to pick up.

Similarly for BHEL, the company's earnings are seen remaining weak going ahead owing to a slow moving order book and no significant order wins.