Download Tax Saving Mutual Fund Application Forms
Invest In Tax Saving Mutual Funds Online
Leave a missed Call on
94 8300 8300
Capital Goods Sector Investing
The turnaround in fundamentals in the capital goods sector is some time away. So, be prudent
MK. Roy has been wondering whether to invest in capital goods stocks. The 45% rise in the BSE Capital Goods Index has left this Ranchi-based lawyer agog with excitement at the prospect of more gains as a new investment cycle be gins. However, he is also apprehensive about the sector's fundamentals and valuations.
Drivers of the rally The biggest driver of the current rally in capital goods stocks is the high expectations from the new government.
The market expects the new government to revive both GDP growth and the capex cycle. The downturn in the capital expenditure cycle was attributed to the policy paralysis that had hobbled the UPA-II government. The NDA government, both stable and reforms-friendly, is expected to be decisive and quick, especially in granting project approvals.
It is also expected to focus on infrastructure development. And, Prime Minister Narendra Modi's own track record in Gujarat inspires confidence among investors.
The economic cycle has also bottomed out. As it revives, investors expect the capex cycle to follow suit. "The belief is that here onward capex can only improve and not decline. Umpteen challenges Currently, the capital goods sector faces myriad problems. The last investment cycle between financial years 2005-08 was driven by investment in the power sector. But that sector is in deep trouble owing to lack of fuel supply.
Capacity addition in the power sector ran ahead of fuel supply . Many power plants are operating at sub-optimal capacity due to lack of coal supply. Gas-based power projects are languishing because the expected supply of gas from the KG Basin did not materialise. Thus, despite India being a power-deficit nation, players will be reluctant to add more capacity. The rupee's depreciation has made imported coal and gas more expensive, thereby foreclosing that option for fuel-starved projects.
Development of many steel plants has been halted due to inadequate coal and iron ore supply .
After 2009, industrial capex declined severely, which in turn had a negative impact on the capital goods sector. Industrial capex is a function of economic growth. When economic growth was high between 2004 and 2009, manufacturers needed to increase capacity to cater to rising demand. But as growth slowed down, so did demand. The rationale for capacity expansion then vanished. In fact, many manufacturers are currently operating at sub-optimal capacity, which means that they will not expand capacity for some time.
Private capex also fell because a lot of projects got stuck, either because they could not complete land acquisition or failed to obtain environment clearance, while some got stalled because their promoters are facing allegations of irregularities and misrepresentation while bidding for them.
Furthermore, many companies took on heavy debt to finance their expansion. Till balance sheets are repaired, you will not see capex expansion. Many of these issues will not get remedied overnight. Hence, reviving the capex cycle, despite the government's best intentions, may take at least a year or more. The current situation While valuations within the capital goods sector have turned expensive, demand hasn't increased significantly to make one bullish on the earnings prospects of these companies. The political change at the centre has triggered expectations of improvement, but it will take some time for the picture to change at the ground level.
What you should do Invest in companies that can offset the weakness in the domestic market by expanding abroad. Companies catering to consumption and urbanisation offer good scope. Stick to players with strong balance sheets and those having strong and ethical management. The management should have demonstrated strong execution capability in the past. Go with companies having large order books. Look for players with an economic moat, say, by way of a technological advantage. Finally, avoid stocks with expensive valuations. For example, Engineers India and Havells have attractive valuations.
Instead of investing at one go, accumulate the stock whenever its price declines. And have an investment horizon of at least three years.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them
OR
You can write back to us at
PrajnaCapital [at] Gmail [dot] Com
---------------------------------------------
Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs
Download Mutual Any Fund Application Forms
---------------------------------------------
Best Performing Mutual Funds
- Largecap Funds Invest Online
- DSP BlackRock Top 100 Fund
- ICICI Prudential Focused Blue Chip Fund
- Franklin India Bluechip
- ICICI Prudential Top 100 Fund
B. Large and Midcap Funds Invest Online
- ICICI Prudential Dynamic Plan
- HDFC Top 200 Fund
- UTI Dividend Yield Fund
- Birla Sun Life Front Line Equity Fund
- Franklin India Prima
C. Mid and SmallCap Funds Invest Online
- Reliance Equity Opportunities Fund
- DSP BlackRock Small & Midcap Fund
- Sundaram Select Midcap
- IDFC Premier Equity Fund
- Birla Sun Life Dividend Yield Plus
- SBI Emerging Businesses Fund
- HDFC Mid-Cap Opportunities Fund
- ICICI Prudential Discovery Fund
D. Small and MicroCap Funds Invest Online
- DSP BlackRock MicroCap Fund
2.Franklin India Smaller Companies
E. Sector Funds Invest Online
- Reliance Banking Fund
- Reliance Banking Fund
- ICICI Prudential Banking and Financial Services Fund
F. Tax Saver Mutual Funds Invest Online
1. ICICI Prudential Tax Plan
2. HDFC Taxsaver
- DSP BlackRock Tax Saver Fund
- Reliance Tax Saver (ELSS) Fund
G. Gold Mutual Funds Invest Online
- Relaince Gold Savings Fund
- ICICI Prudential Regular Gold Savings Fund
- HDFC Gold Fund
- Birla Sun Life Gold
H. International funds Invest Online
1. Birla Sun Life International Equity Plan A
2. DSP BlackRock US Flexible Equity
3. FT India Feeder Franklin US Opportunities
4. ICICI Prudential US Bluechip Equity
5. Motilal Oswal MOSt Shares NASDAQ-100 ETF
0 comments:
Post a Comment