Oct. 31, 2009 (The Hindu Business Line) --

Vidya Bala

If previous bull-market favourites such as Praj Industries (OOTC:PJIDF) or Suzlon Energy were no match for your automobile, metal or mid-tier IT stocks in this rally, brace yourself for some hard facts. The engineering and capital goods stocks may no longer be the front-runners in your portfolio.

While the broader Index for Industrial Production (IIP) has staged a convincing rebound from its lows, there are no clear signs of revival yet from its capital goods component. Growth in the monthly and quarterly average index levels shows that while the IIP may have drawn strength from consumer durables, the capital goods index remains a laggard.

The financial performance of listed capital goods companies too reinforces the above trend, and suggests that a turnaround in the sector may be a while away.

Until there is a clear revival, investors may be better off betting on companies benefiting from capex in the government-driven infrastructure space. Those dependent on industrial capex have been struggling to expand sales. Here are some trends in the capital goods index of the IIP that may help decipher what the prospects of capital goods stocks look like.
Growth in IIP but..

Monthly growth witnessed by the IIP in 2009 improved from a 1 per cent Y-o-Y growth in January to 10.4 per cent - a lively double digits, after a long gap of two years. While March 2009 saw the stock market rebound from the doldrums, the IIP too surpassed its earlier high of March 2008 in the same month. The stock market therefore re-rated companies in the manufacturing sector, including the capital goods stocks, in anticipation.

However, while most other use-based segments of the IIP are closer to, or have surpassed, their previous highs, the capital goods index is still a good 34 per cent away from its peak in March 2008.
… weak capital goods



While the IIP numbers cannot be brushed aside as a flash in the pan, given that they have remained in positive territory since January this year, the capital goods index contradicted this trend with a decline in March, April and May 2009, over a year ago numbers.

This decline is significant as it was the first year-on-year fall since the de-growth in 2001.