Capital goods looks ripe for a long-term bull run

Mumbai: Capital goods stocks could possibly be at the cusp of one of the most rewarding long-term bull markets after remaining on the sidelines for almost 14 years, according to technical analysts. Some stocks have already started their upmove while many others are entering the new uptrend or making the first progress after their big base breakouts, said analysts.

"We are at the cusp of one of the most rewarding long-term inflexions where most stocks can be 3x to 5x over the next many years," said Biju Samuel, senior vice president, Elara Capital. "When most stocks in the sector participate confidently in a secular breakout, the long-term reliability of that inflexion is extremely high. Chart patterns are highly reliable when most stocks in the sector align well to the new bull market."

Capital Goods stocks had a significant run in 5-year period from 2001 to late 2007, followed by a massive correction by March 2009. The BSE Capital Goods index rallied 2,550% between 2001 and 2007. Since then, the sector got lost in a secular bear market. Between 2010 and 2021, the sector gained just 101% compared to a 253% rally by the Nifty Index.


"This is probably the best sector currently, which shows such a strong sectoral current across most stocks," said Samuel of Elara Capital.

Over the long term, the National Infrastructure Pipeline (NIP) will increase government expenditure towards railways, infrastructure and road construction which would also augur well for the sector. Most companies in the capital goods space had resolved their supply chain and labour issues as many Covid19 related restrictions were been lifted.

As most manufacturing facilities are fully operational, the capacity utilisation for the companies will increase in the coming months. Since commodity prices have stabilised, these companies are likely to report higher margins. Stocks like L&T, Bharat Electronics, Elgi Equipments, Siemens, SKF India, ABB, Thermax, and KEC International are currently the top picks among analysts.

Going ahead, analysts expect a pickup in project execution and order inflow.

“With the opening up of the economy, the capital goods sector is witnessing strong traction due to healthy order inflows across companies, rising execution levels in key projects, the improving liquidity situation, and spending by the central government,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

“The government has recently introduced the 'PM Gati Shakti Master Plan' to create comprehensive infrastructure development plan including roads, railways, power, telecom, etc. This is likely to revive the capex cycle and drive further growth in the sector,” he added.