Capital goods index jumps on L&T weightage

The Capital Goods index of the BSE galloped by nearly 200 points today, making it the largest gainer among the BSE indices, which may have prompted many investors to believe that the sector is back to happier times.

But a more careful look at the stocks in the index showed that in reality, the favourable swing was caused by a single stock that has more than 50 per cent weightage on the CG index – Larsen & Toubro, which was aided in a smaller way by the upward movement in the stock price of BHEL.

Together, these two stocks have a weightage of nearly 71 per cent on the CG index of the BSE.

Though the CG index consists of 17 stocks, of which nine were gainers while seven shed value with one remaining unchanged, there was no clear trend showing that the worst was behind the sector.

A look at the top six of the stocks which have a cumulative weightage of nearly 87 per cent on the CG Index would show how much these stocks have run up since the beginning of the 2012 calendar year.

L&T had closed on January 2, the first day of trading in the New Year, at Rs 1009.05. Today it closed at Rs 1202.65, a gain of Rs 30.05. In just two weeks, the stock has run up by about 20 per cent.

On an average the top six counters of the BSE CG index in terms of weightage have witnessed a near 20 per cent gain in value in 2012 so far.

The gains could have been because of the overall improvement in market sentiment and due to factors like expected pause in interest rate hikes and declining trend in inflation.

But the general concern about policy inertia on the part of the Government and infra spending not picking up are yet to be addressed. How these stocks would react once their Q3 numbers are out should also to be considered since these stocks have already run up quite a bit in the past fortnight and further upside may be limited.

But the sharp correction these stocks had witnessed in 2011 has brought the PE ratio of many of them to attractive levels as on January 2.

According to the January 2 data, L&T was trading at a PE of 17, BEL at a PE of 13, ABB at a PE of 99, Crompton Greaves at a PE 13, BHEL was having a PE of 9 and Siemens had a PE of 27.

In view of the near 20 per cent appreciation in value since then, their PE ratios would have to be revised. While many of them still looked to be reasonable, any further upward revision in prices could be justified only on improved performance.