After winning the 2019 elections the Modi 2.0 government is expected to increase its focus on infrastructure spending which will aid capital goods consumption.
Arpan Shah
Capital goods sector is a major contributor to GDP, but the capital goods index, which is considered as a GDP-linked index, has hardly contributed to the broader market in many years. No leadership has been seen in the sector and it has been a laggard in the Indian market for more than a decade.
In November 2007, the BSE Capital Goods index was around 20,500 levels and it is trading near the same levels after more than a decade. So, in these 12 years, the returns from the sector are none. If you compare it with broader index, Nifty50 has moved from 5,500 levels to 12,000 levels, thereby giving manifold returns in the same period. And even in this investment theme, a sector like banking has moved from 9,500 to 31,000 levels in the same period.
Multiple reasons for the slowdown of the sector are the rise in Chinese imports, higher interest rates, overcapacity and stuck old projects. But many steps were taken during PM Modi's first term to reduce the bottlenecks. Inflation under control is one of the biggest achievements and RBI has been reducing rates as well. Going further, RBI is likely to cut further as well.
After winning the 2019 elections, the new Modi government is expected to increase its focus on infrastructure spending which will aid capital goods consumption. It is likely to spend more than Rs 1 lakh crore on infra projects over the next 5 years, and this will be a big boost for the capital goods sector.
On the valuation front, the current valuation of capital goods stocks is very cheap and they are trading below their historical valuation averages. As the investment cycle is about to pick up, investors should be looking to hunt for an investment opportunity in this sector.
BSE Capital Goods Index: 20,430
On the technical front, the index is bouncing back from trendline support and it has broken out from the falling channel on the monthly chart. There is resistance at 21,000 level but once it takes out this level, it is heading for much more higher levels.
Once it breaks out, it will be coming out from the 12 years consolidation, it is likely to take leadership in the market for the next few quarters.
And by no means is this a short term trading idea but this sector is a long term investment opportunity. We have bullish outlook on two stocks from this sector.
L&T: Buy | Target: Rs 1,700-1,900
One of the top pick form the sector is the Larsen & Toubro. This stock has finally broken out from narrow range after months of flat consolidation. It is one of the large cap stocks which holds highest weight in this index and likely to be the biggest beneficiary of upcoming government projects. L&T is involved in different infra projects like road projects (Bhartmala, Sagarmala), Bullet and Metro train project as well as Defence projects.
Looking at the current price momentum we can safely say that it can lead the rally of next bull run. It is a buying opportunity at current Rs 1,550 level with upside target of Rs 1,700 and Rs 1,900. Investors can add on dips till Rs 1,450 and keep the stoploss level at Rs 1,300.
Thermax: Buy | Target: Rs 1,150-1,300
The stock has been in uptrend with higher top higher bottom formation on monthly chart. It is bouncing back from trendline support with 'Doji' candle in last month and bullish candle confirmation at this month.
Thermax's major revenue income is from power sector, capital goods and with revival of the power projects, stock is likely to perform well in coming months. It is one of the midcap investment ideas from the sector with the healthy upside. Investors can accumulate between Rs 970-1,030 level with stoploss level of Rs 850 and upside target of Rs 1,150-1,300 levels.
(The author is Technical Analyst at Monarch Networth Capital.)
Disclosure: Analyst does not have any direct or indirect financial interest nor any other material conflict of interest at the time of stock recommendation in the subject company. He does not have actual/beneficial ownership of one percent or more securities of the subject company. He does not own any stocks however his relatives might own few of the stocks in their portfolio.
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