4 Capital Goods Stocks Revive

The Budget has benefited the capital goods sector. Excise duty reduction from 12.5 per cent to six per cent on certain components required for the manufacture of pumps. Or imposition of 12.5 per cent duty on import of road construction equipment. Both will benefit the segment.

The scrips of :

      1.       Cummins India

      2.       Crompton Greaves

      3.       Lakshmi Machine works (LMW)

      4.       Thermax 

      5.       Voltas

have gained by two to 10 per cent due to these measures.

Also, the excise duty cut might provide some relief to their revenues, though not very significant. However, for some like Cummins India, which saw an excise duty outflow of Rs 304 crore in FY15, this might halve.

Taking into account the Budget amendments and the overall operating environment for the segment, stocks such as Cummins India, Crompton Greaves, LMW and Voltas emerge as favourites. These are either market leaders or among the top entities in the segment they operate. So, even if dull market conditions pinch their earnings in the near term, most of them dominate, making them well-positioned to wade through these challenges. The stock price correction in recent months provides an attractive entry point to these.

Crompton Greaves: Having maintained its third position in the domestic motor market, Crompton Greaves’ domestic power and industrials business has seen a healthy 28 and 12 per cent return on equity, respectively, in a tough demand scenario. Sale of its distressed international power units will bring needed respite to its revenue in FY17 and lower debt.

Cummins India: Despite difficult times, Cummins has expanded its revenue growth from its core segments, namely, power generation and industrials by 23 per cent and six per cent year-on-year, respectively, so far in FY16. Due to its strong presence in the medium and high horsepower engines segments, Cummins will benefit from capital expenditure revival in sectors such as infrastructure, mining, railways and defense, and is one of the best stocks to play the domestic capex cycle recovery.

LMW: Being a market leader with a little over 60 per cent share in the domestic textile machinery sector, LMW also managed to grow its exports, despite a weak global demand situation, by a little over seven per cent year-to-date in FY16. Almost debt-free, with cash of Rs 900 crore in FY15, the order book is also healthy at Rs 2,580 crore. LMW will continue to provide a high margin of safety and an economic moat to investors.

Voltas: A dominant presence in the cooling solutions segment has helped Voltas grow its revenues by 8.3 per cent in FY16, though its profits have come under pressure due to weak execution of the electro mechanical projects (EMP) division, mainly focused on foreign markets, such as in West Asia. While its order book dipped 11 per cent over a year in the December’15 quarter, it trades at attractive multiples, considering the strong performance of the unitary cooling products business and likely recovery in the EMP segment (from this quarter).