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Wednesday, April 17, 2013

A look at Cap Goods and Infra sectors – a guest post

After rallying from their Dec ‘11 lows to their Jan ‘13 tops, both Sensex and Nifty indices have been undergoing corrective moves. While both indices are within 10% of their Jan ‘13 tops, some sectors have done much worse than the indices.

In this month’s guest post, Nishit takes a look at two such beaten down sectors – Capital Goods and Infrastructure, and builds a case for investing in stocks from these sectors with a long-term point of view.

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The Markets are going down every day and several sectors are being beaten out of shape. Capital Goods and Infrastructure are two such sectors. Fresh orders have dried up and stocks from these sectors are at multi-year lows. Let us try and examine these sectors.

Capital Goods and Infrastructure are the heart of any country’s economy. If infrastructure is not built well, no country can expect to do well. These sectors typically work in about 8 year cycles. They see a boom phase for a long time and then an equally long downturn as well.

The last cycle of investments stopped around 2008-2010 period. Hardly any new orders are being booked by most of the companies. The expansion of industry has also halted, and hence the Capital Goods sector is doing horribly.

Now, there will be two factors at play here. First, the existing infrastructure - specially the power plants and manufacturing industry - is getting old. This will lead to replacement demand. Second, as India grows there will be demand for additional power plants and machinery. More interior areas will get developed and become urbanised. This will lead to a lot of work for the Infrastructure companies.

There have been several companies both in the Capital Goods and the Infrastructure space which have been around for decades and have seen several business cycles and have returned stronger. Siemens, L&T, Bharat Bijlee, HCC to name a few.

We do not know how long the current downturn will last. It may well go on for a couple of years more. A smart way of playing this is by doing Systematic Investment in these companies. Most of them are at around 40-50 % from their peak valuations. Investments may be divided into 4 lot sizes. Add one lot now and then add another lot at about 15% higher or lower than the current valuation.

Metals is another sector where valuations have been beaten down. Remember no country can ever expect to grow without Steel being produced. Tata Steel and SAIL have been beaten badly out of shape and these companies have been around for several decades now. They certainly merit a look.

The downturn can go on for some time to come and all investments in such sectors need to be done with a time horizon of at least 3 – 5 years. It is a tough task for most of us but only by investing on such larger time frames can real money be made in the equity markets. The Benchmark Nifty may be down only around 10–12% from its peak in January ‘13 but Steel, Capital Goods and Infra stocks are down almost 40-50%. In every fresh leg of down move, different sectors get beaten down. Banks are currently facing the music. Information Technology Sector could be the next one.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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