Engineering and capital goods companies have been market favourites in the ongoing rally, riding on the belief that the sector will benefit from a revival in economic growth.

Power sector reforms, such as the e-auction process for coal blocks, the new Electricity Bill and the thrust on improving transmission and distribution as well as fuel linkages, have contributed largely to this sentiment. The ‘Make in India’ campaign has provided a booster shot, too. However, even as stocks have spiralled upwards, the sector is not entirely out of the woods. The BSE Capital Goods Index now trades at a trailing 12-month PE of about 33 times — much higher than the Sensex’s 19.5. In the first six months this fiscal, average net sales growth of engineering and capital goods companies that are part of the CNX-500 index remains flat, at best.

Adjusted profits have grown 7-10 per cent overall, but several companies such as BHEL, Engineers India, Graphite India, BGR Energy, Ingersoll- Rand and Jyothi Structures continue to show a fall in profits over the corresponding period a year ago.

BHEL, for instance, is still plagued by weak execution in several power projects due to hiccups related to environmental clearances, fuel linkages or financial issues. Many companies, such as compressor-maker Ingersoll-Rand, are still in the dark for lack of a pick-up in industrial capex spends, the main growth trigger. But going by the IIP and other lead indicators, manufacturing is improving. Better demand and lower borrowing costs will encourage capex by industries over the next few quarters. Capital goods, being a late-cycle business, will then see an improvement.

What the Budget can do immediately, though, is to push power sector reforms, speed up project clearances and encourage domestic power equipment makers by hiking duties on equipment imports.

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