Top fund houses turn overweight on capital goods amid capex revival signs

With capacity utilization showing improvement, money managers are raising their bets on the capital goods space. According to data collated by Edelweiss, top-five fund houses’ average overweight on capital goods stood at 536 basis points (bps) vis-a-vis Nifty 200. This was the highest overweight seen in the last three months.

Fund managers are of the view that the recovery in private capex cycle is not far away with a huge capex deficit that needs to be bridged. “Due to several macro variables in the last five years, the capex cycle has remained depressed. Going ahead, India’s GDP is expected to compound at seven per cent annually. These estimates indicate the huge capex that will be needed to keep up with the growth rate,” said Sailesh Raj Bhan, deputy-chief investment officer – equity investments of Reliance MF. 

Bhan added that these businesses offer a huge operating leverage and that makes them interesting opportunities at current valuations. Within the capital goods space, MFs were seen increasing their position in names like Larsen & Toubro (L&T) and National Thermal Power Corporation (NTPC), shows Edelweiss data. In July, MFs bought 5.1 million shares of L&T, while they picked up 44 million shares in NTPC.

Harsha Upadhyaya, chief investment officer-equity of Kotak MF, cautioned that while we could see a revival in the capex cycle of engineering and capital goods companies, it is unlikely to be as strong as what was seen between 2003 and 2008.

Sell-side analysts are positive on some of these capital goods names.

Analysts at CLSA said that L&T’s divestments will further shore up its cash reserves, which means that the present buyback is unlikely to be its last. “L&T has an active pipeline of divestitures of at least $2.1 billion, which will release $1.6 billion in cash. Further, L&T has other assets lined-up for divestiture over FY19-21 such as Nabha Power, toll-ways and potentially a part stake in Hyderabad metro. We believe the ensuing buyback may not be the last. Buybacks will not only boost its return on equity by some 85 basis points, but also create a floor for the stock, which has fallen nine per cent over the past three months,” analysts said in a note.

NTPC is being seen as a value-buy, post its correction. “A 13 per cent fall in NTPC from its recent peak factors in a lot more pessimism. The company is getting closer to a robust growth in its regulated equity (RE), which will expand its return on equity by 120bps over FY18-20,” analysts at CLSA said.

NTPC works on a regulated return base model, where the utility gets 15.5 per cent return on equity (RoE) on every project, while additional incentives are provided in case of increased capacity utilisation.  


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