Capital goods index hits all-time high. Will the bullish run continue?

Capital goods stocks have put up a strong show so far this year on the back of strong orders despite geopolitical uncertainties and rising interest rates.

The BSE Capital Goods Index has hit an all-time high this month and has rallied 7% this year. In comparison, the 30-share Sensex pack has lost over 2% on a year-to-date basis.

Among the capital goods pack, ABB India and Siemens are leading the charts this year with their shares appreciating 26% and 18% respectively. Index majors L&T and HAL have rallied 9% each so far this year.

For the past one year, HAL, AIA Engineering and ABB India have been among the top performers in the capital goods segment with over 50% returns.


According to analysts, the Union Budget's heavy emphasis on capex coupled with consistent order wins have been positive for capital goods companies on the operational front.

Further, capital goods stocks have been favourite of foreign portfolio investors (FPIs) with net investment of Rs 6,000 crore this year.

"Despite challenges from the export side and commodity inflation, capital goods companies have clocked strong volumes. In FY23, particularly in the fourth quarter, EPC companies have received strong orders across the board from government capex and power transmission etc.," said Amit Anwani - Research Analyst, Prabhudas Lilladher.

"With the segment being cyclical and in the current upcycle, companies with good operational performance have seen strong re-rating and thereby appreciation in frontline capital goods stocks," Anwani said.

"The pickup in export orders helped inflows for the EPC companies like Larsen and Toubro and KEC. We expect a pickup in domestic power grid awards for capital goods and private capex pickup will aid strong inflow," HDFC Securities said in a report.

What should investors do?
Analysts say there could be frontloading of orders as we get close to the election year, which will benefit capital goods companies.

"With block orders in the coming quarters, the next year could be even better for capital goods companies despite a high base of FY23. As long as the performance is continued, the valuation re-rating will continue in the upcycle till the peak is achieved," said Amit Anwani.

"As we enter FY24, we expect ordering pickup to be broad-based with government capex key drivers of ordering. Capital goods will benefit from the secondary impact of public capex and from brownfield capex/opex opportunities driven by productivity-linked savings," HDFC Securities said.

The brokerage is positive on L&T, Cummins India and Kalpataru within the capital goods space. Meanwhile, Amit Anwani of Prabhudas Lilladher is bullish on Siemens, BEL and KEC Ltd going forward.

(With data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)