Dismal FY11 numbers and slowing project execution have led to a sharp fall in share prices of capital goods and infrastructure companies this year. Most of the capital good stocks have given a negative return (from 15% to 60%) for the year till date except ABB which gained 5% during the period.
Infra stocks were on a decline since the beginning of 2011 as rising raw material and interest costs started weighing on its quarterly profit numbers. BSE Capital goods was down 16.4% for the year till date as against a 13.5% fall for Sensex.
According to Gopal Agarwal, deputy CIO and equity head, Mirae Asset ? The slow-down in the government orders over the last one year has affected the topline growth of many capital goods and infrastructure companies. Due to higher commodity prices and mounting interest rates there has been a lag in government spending on infrastructure .? He added that while there has been some activity on the private capex front, it is mainly concentrated towards efficiency improvement and brown-field projects instead of mega green field projects.
A similar view was echoed in a recent report by Citi which cited infrastructure capex to be in doldrums despite a revival in industrial capex.
The report said that while there are hopes of a recovery in infrastructure capex in the second half of FY12 (2HFY12) due to a base effect and a pick up due to 8% GDP growth expectations, the impact of higher interest costs may only start showing in 2HFY12 which may hinder these positive expectations. The report also cites most current concerns relating to the rate of execution with negligible fresh sanctions.
?Amidst these headwinds for the sector, the only silver line appears to be the deep corrections experienced by a majority of infrastructure stocks. Given the underweight ratings granted to these stocks by most fund houses and brokers, they may see a preferred buying interest as soon as the interest rate cycle peaks or the government spending shows a recovery,? added Agarwal.
The March quarter added to their woes with a further decline in the order inflow even as order book surprisingly expanded. As per experts, given the continuous slow-down in government spending in a high interest-rate scenario, and limited growth in the private capex, the sector may be under pressure for some more time.