Twitter
Advertisement

Capital goods goes one up on St, but rally may run out of steam

A dismal show in the past has led to a lot of bottom-fishing in these beaten-down stocks.

Latest News
article-main
FacebookTwitterWhatsappLinkedin

Capital goods continued to stay ahead of markets for the fifth consecutive day on Thursday, but the experts believe it may be too early to buy aggressively into these beaten-down cyclical stocks.

While the BSE Sensex ended marginally down for the third consecutive day after hitting 21000 in the intra-day trade on Thursday, the capital goods sector stood out, once again rising 1.15%. The S&P BSE capital goods index has now gained 27.5% since the start of September as against the BSE Sensex’s 11.31% climb.

Neelkanth Mishra, head of India equity strategy at Credit Suisse, believes that while a huge below-par show of these stocks over the last year has led to people engaging in bottom-fishing in beaten down industrial, PSU banks and metal stocks, a sharp rise is an opportunity to sell. “Given the current positioning, a rally in these stocks can last a few weeks more, but with earnings estimates still falling, we believe the current rally would also end badly,” he wrote in a note on Monday.

Piyush Nahar, equity analyst at Jefferies India, said that while the valuations for industrials (capital goods) have corrected in line with falling return ratios that are near their all-time lows, they could face further pressure as the cycle worsens. “While part of the decline is due to structural factors such as increased competition, it has been mainly due to a fall in asset utilisation... The returns on equity (ROEs) could worsen further as margins are on a cyclical downtrend and utilisation remains low,” he wrote in a note last week.

The experts continue to remain overweight on export-oriented sectors like IT and pharma despite their impressive numbers over the last one year. “In the case of a stable economy, we prefer IT and pharma, where valuations could see improvement. Even If the slowdown continues, we would still prefer the low beta sectors - IT, pharma and staples,” wrote Nahar.

Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services, is on the same page. “IT and pharma space have been very profitable ones and as the global economy recovers, one should be strongly positioned in these sectors though selectively,” he said.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement