Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Capital goods: Can 2011 be any better? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 29, 2010

    Capital goods: Can 2011 be any better?

    India's capital goods (CG) companies were amongst the best performers of the previous bull-run that ended in 2008. Most CG stocks were among the investors' favourites. In fact, two of them - BHEL and L&T - are among the best-performing blue-chip stocks of this decade. However, when it comes to 2010, the performance the sector has been mixed to say the least.

    As we see from the chart below, the BSE-CG Index has underperformed the BSE-Sensex during 2010. This is however notwithstanding the fact that a large part of the underperformance came in during the final months of the year. Overall, the CG index rose by 8.4% during 2010, as compared to 15.6% gains for the Sensex.

    Data source: CMIE, Prowess

    Now if we were to take a look at individual companies from the CG index, there arises a mixed picture. Of the 19 companies from the index, 9 delivered returns in excess of the 15.6% return of the Sensex during 2010. The remaining 10 companies underperformed the Sensex, with 9 of them actually yielding negative returns.

    This defies the popular market notion that companies from underperforming sectors underperform the broader indices as well. In the case of CG stocks, investors have rewarded companies with strong growth and reasonable valuations irrespective of the sector's overall performance.

    Let's now look at the best and the worst from the CG space during 2010.

    Best performers: Here is the list of best performing stocks from the CG index during 2010. The list is topped by Havell's India. This is a mid-size electrical equipments company and has largely benefited from the business restructuring it did to improve its balance sheet in 2010. The stock was trading at attractive valuations at the start of the year, chiefly because the markets perceived its problems to continue for long. But the company restructured itself, paid off large part of its debt, returned to high growth part, and its investors were subsequently rewarded for their patience.

    Best performers
    Company Name Returns in 2010
    Havell's India 50.4%
    BGR Energy 45.1%
    Thermax 41.7%
    Siemens 40.8%
    Lakshmi Machine 36.8%
    Data source: CMIE, Prowess

    As for the other good performers from the sector, it was largely a case of improved financial performance combined with low valuations at the start of the year.

    Worst Performers: Now take a look at this list that shows the worst five performers from the CG space during 2010. Punj Lloyd and Suzlon top the list, and for very obvious reasons. The former remains shrouded under one legal suit after another on some of its international projects. And this has taken a heavy toll on its overall performance. The company still boasts of a big enough order backlog, but investors are seemingly cautious about the execution of the same. We believe these concerns are very valid.

    Worst performers
    Company Name Returns in 2010
    Punj Lloyd -47.3%
    Suzlon Energy -43.0%
    Gammon India -30.6%
    Praj Industries -28.6%
    Reliance Ind. Infra. -21.9%
    Data source: CMIE, Prowess

    Let's now understand the case of Suzlon, The company was growing fast, raising capital for future growth, and making large scale acquisitions. This was until it hit upon a speed breaker in 2008. Its wind-power equipments started breaking down. Customer complaints piled on. Some of them even cancelled ongoing contracts. Its balance sheet started showing stretch marks. Its cash flows dwindled. Overall, its financial position went from bad to worse. The stock took a severe beating, and has still not recovered its losses. Instead, investors continue to bleed as the company's performance is getting worse by the day.


    The performance of CG stocks during 2010 make two things very clear. First, it is very important to study business performance instead of just buying any stock expecting it to go up over time. And second, valuations play a key role in a stock buying decision. So even if you expect the sector to do well and the companies to grow strongly in the future, your buy price will determine your returns over the long term. As Warren Buffett has often said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

    Now as far as our 2011 outlook for CG stocks is concerned, we believe that these two aspects - business performance and valuations - will continue to play important roles. The overall basket of stocks from the sector does not look cheap at this point of time. However it is still advisable to study companies individually, understand their growth prospects and see if the valuations are fair or cheap.

    Most companies from the CG sector have good growth prospects considering India's plans for large-scale infrastructure spending. But then, even the execution issues are high as we have seen in cases like Punj Lloyd, Suzlon, or for that matter BHEL.



    Equitymaster requests your view! Post a comment on "Capital goods: Can 2011 be any better?". Click here!


    More Views on News

    BHEL: Margins Dip into the Negative (Quarterly Results Update - Detailed)

    Aug 14, 2017

    The company also saw order inflows of Rs 18 billion during the quarter, which was a massive 41% YoY lower than the previous year's quarter.

    Cummins Ltd: Domestic Revenues the Saving Grace (Quarterly Results Update - Detailed)

    Aug 14, 2017

    The domestic economy continues to grow largely in areas which are positively impacted through continuing government investments in infrastructure.

    ABB: Large Orders Remain Muted (Quarterly Results Update - Detailed)

    Aug 2, 2017

    Decisions on government initiatives and private investments were stalled in anticipation of upcoming tax restructure.

    L&T: Amidst a Challenging Business Environment (Quarterly Results Update - Detailed)

    Aug 1, 2017

    Bank credit to industry remained muted and investment momentum was driven mostly by public sector spending.

    L&T: Private Sector Capex Remains in a Tizzy (Quarterly Results Update - Detailed)

    Jul 24, 2017

    Vast majority of private players remain more concerned with debt payback rather than starting new projects.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)