A longer period of pain for consumer durables and capital goods, but brokerages see strong growth in 5 stocks

The COVID-led disruption has been unprecedented for the business and economy.

While some sectors of the economy may see some relief after the lockdown ends, there are some, such as capital goods and consumer durables, that may have to wait for a longer time to see normalcy returning.

Brokerages point out that the capital goods sector has seen lower order inflow in the last couple of quarters especially from the private sector due to factors, including overcapacity and land acquisition issues.

In the aftermath of the slowdown in the investment cycle for the last few years, COVID-19 is likely to prove to be the last nail in the coffin for the sector.

For the consumer durable companies, Q4FY20 started on a strong note with strong volume growth in January and February 2020. However, their volume was affected towards the end of March owing to the COVID-led nationwide lockdown.

"The companies which were experiencing supply-side issues from China during January-February 2020 period, now face demand issues across product categories," said Arafat Saiyed, Assistant Vice President at Reliance Securities.

COVID-19 is expected to have a significant impact on the capex cycle, which has already been muted for the last couple of years.

"The government's priority now is providing the basic necessities for survival, while capex and infrastructure development will be delayed by at least 6-9 months. The companies having a healthy balance sheet, strong cash and long-term scalability throughout disruptions will pass this phase rather easily," said Saiyed.

Here are 5 stocks from the above two sectors that, as per brokerages, look attractive for a long-term perspective. Take a look:

Analyst: Arafat Saiyed, Assistant Vice President at Reliance Securities

KEC International | Buy | LTP: Rs 208.60 | Target price: Rs 328 | Upside: 57%

Shares of KEC international have corrected about 45 percent in the last 2 months owing to COVID-led disruptions, which, as per the analyst, offers a fresh buying opportunity, as the company has already received approvals from the respective authorities to start operations at a few of its sites albeit in a phased manner.

The current order book stands at Rs 2,1000 crore, while order inflow for FY20 is seen at Rs 11,000 crore (down 22 percent YoY).

Domestic orders contribute 62 percent to the order book, while international projects account for about 38 percent.

As per the analyst, the management has guided that the revenue is expected to decline marginally (Rs 300 crore) in Q4FY20.

Larsen & Toubro | Buy | LTP: Rs 839 | Target price: Rs 1,670 | Upside: 99%

The analyst expects Larsen & Toubro to report an order inflow of Rs 66,000 crore in Q4FY20 as the company has already announced orders worth about Rs 50,000 crore to the exchanges.

For FY20, the company has guided for order inflow growth of 10-12 percent.

"We continue to view Larsen & Toubro as a proxy play of CAPEX revival in India considering a huge opportunity, proven execution track record and strong diversification," said the analyst.

Crompton greaves Consumer | Buy | LTP: Rs 208 | Target price: Rs 344 | Upside: 65%

Crompton has a relatively low share of seasonal products and healthy cash balance which enables the company to stay strong in the downturn.

The analyst expects Crompton’s competitive positioning to remain strong with new entrants facing pricing and working-capital challenges.

"COVID-19 will impact Q4FY20 and Q1FY21 performance. The strong balance sheet will help tide over the lockdown period with support to vendors and channels. With continued strong demand for new launches, market leadership and robust distribution network, we expect Crompton’s earnings to clock 16 percent CAGR through FY19-22E," said the analyst.

Brokerage: Anand Rathi Shares & Stock Brokers

Dixon Technologies | Buy | LTP: Rs 4,409.70 | Target price: Rs 5,392 | Upside: 22%

The brokerage highlights that the company is well placed to cater to mounting demand across multiple categories in the rapidly growing Indian consumer durables sector.

"Dixon’s scale and size give it an edge. With robust aspirational demand in India, customs-duty structures being inverted to support Make-in-India, and GST rates rationalised, Dixon’s growth seems to be aligned with strategic steps. Further reduction in GST rates would eventually result in deeper penetration," said the brokerage.

With manufacturing operations in India ramping up, established domestic and global brands in India are looking at lowering imports in a phased manner. This would help in adding clients and ramping up volumes in existing and forthcoming product categories.

"We model 24 percent and 32 percent CAGR over FY20-22 in respectively revenue and PAT, resulting in the RoCE expanding from 26 percent in FY19 to about 36 percent in FY21 and FY22," said the brokerage.

Amber Enterprises | Buy | LTP: Rs 1,124 | Target price: Rs 1,437 | Upside: 28%

As per the brokerage, Amber has gradually emerged as a contract manufacturer for domestic room ACs. It is set to emerge stronger after COVID-19 as rising financial pressure on OEMs might compel them to increase the outsourcing of components as well as fully-assembled ACs.

Its customers now include most OEMs, domestic and MNCs, as well as white-label brands of leading e-commerce portals and chain stores, courtesy its service portfolio capable of providing end-to-end solutions. This, its key strength should help it emerge stronger after this black-swan event, said the brokerage.

"Anticipating shrinking demand from OEMs, we lower our FY20e PAT 4 percent, and about 18 percent for FY21 and FY22. We now model consolidated revenue/PAT CAGRs of 15 percent/18 percent over FY20-22, resulting in the RoCE expanding from 19 percent to 20 percent," said the brokerage.

The brokerage believes Amber is well placed to emerge stronger from this unprecedented event, considering that its contract manufacturing abilities would be further strengthened by rising deemed exports in FY21 and FY22.