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Janyanta Mallick

Kolkata, Oct. 5

The capital goods stocks today rode a tidal wave of investor frenzy. According to analysts, India @ 60 is seeing an unprecedented capital cycle. The capital goods sector obviously is in the limelight for surge in capex across the industries.

According to Mr Gul Teckchandani, an independent market strategist, the money is being poured into the capital goods stocks keeping long- and medium-term growth potential in mind.

However, in the backdrop of an extraordinary demand, the valuations of the frontline stocks in the sector are hitting the roof. “The stocks below the first tier, thriving in the same space, still have more rational valuation,” he added.

Mr Arun Kejriwal, an analyst, echoing the same sentiment, felt the sector heavyweights have already reached or crossed their “fair valuation” levels. “Some of them may disappoint investors, who are entering now, in the short to medium term.

But he thinks the long-term outlook for the sector — in view of growth potential in infrastructure, rise in overall consumption/demand and corporate spend on expansion projects — remains bright.

“It is not the large and frontline firms, all the companies in the capital goods segment are witnessing a situation when they are almost or fully booked for the next several quarters. But, investor focus has largely been on the top runners.

The second tier companies have relatively languished in terms of valuation,” he added. On Friday, ABB gained 1.4 per cent, Bharat Heavy Electricals Ltd 2.96 per cent, Kirloskar 3.72 per cent and Greaves Cotton 3.21 per cent. On the back of these stocks, the BSE Capital Goods Index surged 3.21 per cent.

The Rs 2 face-valued stock of Larsen & Toubro, an engineering behemoth, shot up to hit its 52-week high at Rs 3,199, but came down sharply to finish with a gain of 6.5 per cent at Rs 3,089.65, with a combined volume of over 29-lakh shares on the NSE and BSE.

The professionally managed company, which does not have any promoter, has a huge order book backlogs. Its current paid-up capital is small – Rs 56.75 crore and has more than doubled from Rs 28 crore as on September 30, 2006, mainly through conversion of FCCBs. Moody’s has assigned its instruments Baa2 rating, a notch above country’s sovereign currency rating. It general reserve stands at Rs 5,684 crore. A Bloomberg report quoting Mr M.V. Kotwal, Senior Executive Vice-President, as saying that L&T will build ships for the navy and companies at a proposed Rs 2,000 crore shipyard, expanding the marine business to tap rising demand for sea transport. However, Mr Arun Kejriwal feels the current valuation is based more on euphoria than on fundamentals.

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