While the BSE Capital Goods index has gained over 21% YTD on hopes of capex cycle reviving after the election, the recent IIP data show a disparity between the on-ground performance and market expectations. According to a recent IIP data, the capital goods sector saw its February output falling 17.4% y-o-y .
Experts believe a change in guards at the Centre is unlikely to revive the capex cycle. “We disagree with the consensus view that election results can revive the investment cycle. Only a fourth of projects are stuck with the central government and two-thirds of these are in power and steel sectors, both wracked with massive overcapacity. Only state governments can revive the power demand. For other sectors like roads and railways, solution may take years,” Credit Suisse analysts said in a recent note.
Sadbhav Engineering (51.67%), Crompton Greaves (44.47%), Suzlon Energy (38.18%), Larsen & Tourbo (23.58%) and Havells India (16.94%) are the major gainers year to date.
Experts believe the capital goods stocks may start underperforming by end of the year. “The rally since February has been led by industrials and financials. We expect this to continue in the first phase (after election) despite no change in fundamentals, as P/E multiples have room to expand. In the third phase, which roughly extends till the year end, we expect these sectors to underperform, as we expect the investment cycle and asset quality to stay weak for several years,” added Credit Suisse analysts.