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Capital Goods: Coming out of hibernation

ICICI Securities 02 Feb 2022

What’s Buzzing:

The BSE Capital Goods index has been marching northward after resolving out of a multi-year underperformance. We believe the capital goods space is well placed to gain from the increased outlay of capital expenditure in Union Budget 2022-23, coupled with expanding the scope of private capex through PLI for new age segments. We believe the decade long range breakout portends a new bull cycle in the capital goods sector.

Context:

On the technical price chart, the capital good sector has registered a resolute breakout from 13 year’s broader range after the 2002-07 cyclicals driven rally, exhibiting a structural turnaround. As a strong tree requires sturdy roots, we believe past 13 year’s hiatus has come to fruition and paved the way to ignite the secular up move in the capital goods sector in coming years.

Within the space, key index heavyweights like L&T, Siemens, BEL, SKF India, Thermax have recorded multi-year breakouts and set the stage to accelerate the next leg of up move. Empirically, multi-year breakouts have provided decent returns in subsequent years. We believe adoption of a new growth template led by vital capex allocation in Union Budget 2022-23 would drive the economy. Thus, companies with stronger balance sheets and cash flows are well placed to gain the most from a gradual economic recovery.

Our Perspective:

Taking cognizance of a decade long consolidation breakout along with its constituents, which have just recorded a strong breakout from multi-year consolidation, has confirmed the structural bull market for coming years. We expect the sector to outperform in coming years wherein companies like L&T, Siemens, ABB, BEL, Thermax, HAL, ESAB, Voltamp, SKF India, ACE, Techno Electric are poised to generate above average returns in years to come and should be considered as long term investment bets in portfolios.

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