Tailwinds of restructured operation and capex cycle: 5 stocks from engineering sector, 2 with upside poten

Capital goods and engineering is a very broad term. From a company making small machinery parts to one making a large turbine for power generation all tend to get clubbed together. But they are all different, both in their ability to perform complex tasks and the industry they are catering. While a power turbine maker had tough times given the fact hardly any new power plant came up in the last ten years. Some others like the ones which were dealing with railways, had a good time given the expansion and modernisation of railways has been on fast track.

In the last nine years, it has been government spending which has been at the forefront of capital expenditure. But if one goes by the recent estimates of sanctioned loans by the banks, there are indications that private sector capex which has been at the literally non-existent for quite some time might be coming back. Which sector in the capital good space will gain is a big question because capital goods and engineering is a very broad term. From a company making small machinery parts to one making a large turbine for power generation all tend to get clubbed together. But they are all different, both in their ability to perform complex tasks and the industry they are catering.

Among many industries which have seen a strong transformation in the last nine years due to policy initiatives has been the sugar industry. This is despite the fact that sugar is a state subject where central policies can only play a limited role. If one looks at the balance sheet of a large number of them, they are far better placed than they were six years ago and to some extent in the last two years even the institutional investors have started to take exposure in this sector which they have avoided for more than three decades.

While the recent performance of stocks like REC, PFC and recently listed IRDEA has brought focus back to one segment of power companies. But the fact is that in the last few years, the sector has been going through a consolidation. Some of it was forced by the banks due to many companies going under the IBC and some due to the fact that any industry which has gone through a troubled phase of almost a decade, the players who are able to survive tend to get more attention because they have learnt the art of surviving a tough phase which is one most important feature for long term survival. Power sector stocks are now catching up with what the market has witnessed in the last few years.

Capital goods and engineering companies had faced tough times for many years. Given the fact that hardly any capacity buildup was taking place in any industry, a number had to change their product portfolio and had to live with very low margins. But all the efforts have now started to show some results. Three things impact the demand for capital goods . First, spending by the government, spending by the private sector. Last but not the least the focus of the government policies. After the state election results, there is a higher probability that two out of three factors are likely to continue to play. Will this lead to another round of strong re-rating?

While the capex cycle has been moving well in sectors like railways, road and other infrastructure sectors for some years. In sectors like cement, chemicals, pharma which are driven by the private sector, indications of capital spending on adding capacities, what is commonly called private sector capex coming back are visible. One industry which benefits from this capex would be the capital goods sector, but one has to be very careful in choosing the stock as the word “capital goods stocks” is prone to getting misinterpreted.

In 2008, the IPO of a power company got subscribed in less than a minute of its opening and the size of that issue was Rs 11,563 crore. This just shows the desire to own power sector stocks at that point of time. From those days of frenzy to the nadir in 2014, when power companies were on the top of the list of NPA of the banks. Power companies have seen both the extreme of valuations. It is a sector where after many failures and to some extent a consolidation, some companies have emerged which know how to deal with all kinds of economic and industry cycles. That is probably the reason why a number of companies from the power sector have seen a sharp re-rating in the last one year. Hoping the survivors have learnt their lessons.

Foreign portfolio investors pumped in more than Rs 43,300 crore into the capital goods sector in 2023, and this was nearly six times higher than that in 2022, data by NSDL showed.

One change for making higher provision for unsecured loans and we see all the NBFC stocks tumbling. But four weeks later what is the situation, no one on the street is even talking about it and stocks have crossed the level when the announcement was made. The fact is that some regulatory measures are indicators of overall growth potential which the regulator is just trying to moderate in order to avoid overheating of some segment of industry. The other question is that an industry like NBFC which is bound to grow given the fact that capital was, is and will remain a scarce commodity, which are the benchmark which one should use to take exposure with a long term perspective.

The correction which was essentially started with a large cap segment has moved into mid-cap stock. It is not the first time this correction has taken place and a similar trend is visible in the past also. In such times it would be better to select stocks where analysts are bullish. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . This predefined screener is only available to ET Prime users.