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Informist, Thursday, Mar. 13, 2025

MUMBAI - The near-term gains of capital goods stocks are likely to be muted, though the medium-term outlook is positive, supported by expectations of more traction in the government's capital expenditure and better corporate earnings, analysts said. "For capex-driven companies, we are expecting a better quarter in terms of margins and growth," an analyst tracking capital goods companies at a domestic broking firm said. Given the slowdown in executions in Apr-Sept due to elections and monsoon and lower-than-expected earnings performance in Oct-Dec, the March quarter should be a lot better, the analyst said. 

The government's capital expenditure has picked up the pace since November. According to Controller General of Accounts data, the capital expenditure has risen 67% on year during Nov-Jan compared with (-)15% in the first seven months of the financial year. Sequentially, the government's spending is much better in the March quarter than the previous three quarters in an attempt to meet its capital expenditure target. As per the revised target, the capital expenditure should grow 21-22% on year in the March quarter, the analyst said. 

Many capital goods companies were expecting the second half of FY25 to be better than the first half but it was not reflected in the December quarter earnings. On an aggregate level, revenues of 17 capital goods companies, which are part of the Nifty 200 index, grew nearly 18% on year in Oct-Dec, slightly lower than analysts' expectation of a 20% rise, according to Informist's analysis. Orderbooks of capital goods players remain healthy after seeing a slowdown in Apr-Sept, which recovered in the December quarter. "There's no problem in orderbook and revenue visibility... Execution and margin growth have been key challenges," the analyst said. 

There are also some worries about a growth slowdown in the next 2-3 years due to higher competition and overcapacities in some segments--such as transformers, motors, and cables--which could also lead to margin compression. In February, cement giant UltraTech Cement announced plans to enter the wires and cables segment in two years, with a capital expenditure of INR 18 billion. This led to selling pressure on other players, including Havells India, Polycab India, KEI Industries, and RR Kabel.

However, sentiment improved after some broking firms said that they see only a modest impact of UltraTech's entry into the wires and cables business. Some industry players also said that it would take at least three years for UltraTech to start production of wires and cables and the costs will be significantly higher. 

Meanwhile, data from the National Securities Depository showed that foreign portfolio investors net sold shares worth INR 44.60 billion of capital goods companies in February, mirroring the trend in the overall stock market. On Thursday, the BSE Capital Goods index closed 0.1% lower at 57756.79 points, down for the second consecutive session. However, the index rose in March after closing lower for three consecutive months. 

Among specific stocks, Bharat Electronics closed over 1% higher Thursday and was the top gainer in the Nifty 50 at INR 280.07 on the National Stock Exchange. The stock rose after the company said it won a INR 24.6-billion order from the Indian Air Force for radars. Nomura Global Markets Research retained its 'buy' rating on the stock and said the company is on track to achieve its order inflow guidance as it is currently in the final stages of multiple negotiations with customers. 

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Following are the resistance and support levels for the sector's key stocks for next week, as per calculations based on their prices on the National Stock Exchange:

End

Reported by Anjana Therese Antony
Edited by Saji George Titus

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