INSUBCONTINENT EXCLUSIVE:
By Shyam SekharIf I were to pick one theme for 2019, it would be capital goods
It has seen multiple false starts since 2008
to power in 2014 raised expectations of big investments
But the theme simply refused to play out, as Indian businesses did not have the balance sheets to invest and were struggling with already
This led to prolonged delays in investment growth and poor growth and earnings performance by the companies in this space.
Investors are now
loath to bet on this theme any more
Order books of several companies look very ordinary
Management commentaries look rather soft and we see a clear hesitation among them to issue positive guidance.
Caution is the buzzword
Investors prefer to look at other parts of the market
They have either lost big money in this theme since 2009 or tired out completely due to the many false starts from earlier predictions
The complete lack of investment performance has dented investor interest, and analysts tracking these companies are also few now
Nobody wants to bet on it
There is severe investor fatigue.
So, what can change What can change now is the steady growth in capacity utilisation of user industries
With several user industries nearing their capacities or expecting to fully use existing capacity over the next 24 months, they are
beginning to contemplate new capacity creation
This will see demand for capital goods grow over the next two -three years
Companies in the capital goods
space will see robust growth over the medium term and this should translate into significant operating
leverage.
Importantly, the problems that capital goods companies faced in the past cycles due to higher receivables may henceforth be muted
We have a more robust framework for recovery and only stronger companies with healthy balance sheets are likely to receive funding in this
NCL and IBC frameworks are also a strong deterrent for companies from stretching themselves thin
The risk of losing ownership itself is high and recent instances must be fresh in their memory.
Choosing companies in this space for
investment must be done cautiously
It is important to bet on efficient parts of the value chain
Better allocators of capital must be picked, and higher margin businesses should benefit more from operating leverage
This is where consumables and light engineering companies are looking better.
Broadly, these companies are engaged in the manufacture of
bearings, refractories, gears, abrasives, welding electrodes and cutting tools
They are definitely not looking cheap
They mostly appear fairly valued based on trailing 12-month earnings.
But given the possibility of operating leverage kicking in over the
next few years, these companies are likely to become more attractively valued
Buying these stocks now at what may appear fair or marginally stretched valuations will ensure that you are not left out when they get
re-rated later.
Investing in them and expecting them to time correct for a while can be a reasonable way of betting on them
The time invested in waiting should pay out handsomely as returns.
(Shyam Sekhar is Chief Ideator at iThought
