Slowing demand and a bleak investment outlook is taking its toll on the capital goods sector, which historically has been an out-performer during the market rallies.
In contrast to that trend, In the current calendar year (CY13), the BSE Capital Goods index has lost 8.41% while the Sensex is up 3.27%. Most of the capital goods heavy-weights have had a rough year so far. According to Bloomberg data, shares of BHEL have declined 11.16% in CY13. Siemens and ABB have seen a fall of 11.36% and 7.55%, respectively, while L&T has lost 5.5%
Market players attribute this to two key challenges ? growing competition and slowing demand ? faced by most capital good companies.
?There is constant capacity expansion. Companies are seen constantly forging tie-ups. Also, presence of several players has made this sector highly competitive. This is putting pressure on the margins,? says AK Prabhakar, senior VP-equity research, Anand Rathi Financial Services.
Incidentally, the impact of these pressures was clearly visible on Wednesday when sector heavyweight L&T reported a worse-than-expected fall in the net profit for the March quarter. The company announced a 7% decline in its net profit to R1,787.9 crore.
L&T scrip lost 5.57% to close at R1,517.10. This is the highest single-day fall in percentage terms in more than three years. Acknowledging a slowdown, the engineering major said the environment continues to remain challenging for the whole sector. L&T reported R4,000-R5,000 crore of ?slow moving? orders.
Going by the guidance given by the L&T management and most other capital goods companies, experts feel that the outlook for the sector remains weak on account of poor execution of orders and declining investment trends in the economy.
?One can only see recovery after the investment cycle picks up and there is support from the government in terms of policy. The sector?s performance is reflecting the economic cycle that has been playing out. We are seeing a consumption-led growth, not an investment-fueled one. However, it is difficult to gauge when will this sector revives,? said Piyush Garg, CIO, ICICI Securities.
Even in FY13, the BSE Capital Goods Index under-performed, losing 10.08% compared to the 8% gain recorded by the Sensex. Only three stocks ? Thermax, Lakshmi Machine and Havells ? of the 22-share index, managed to outperform the BSE barometer in this period. This is unlike the trend seen during previous rallies such as the one in FY10 when the BSE Capital Goods Index gained 78% compared to the 54% return given by the Sensex.