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Sector update: Capital Goods; Capex - uptick seen but sustainability key

CMIE’s capex data reflects improvement in Q3FY20, with sharp 38% yoy increase in new announcements to Rs4,279bn (up 2.8x qoq). However, we believe the depth of improvement is weak, primarily led by two large projects, which account for ~71% of the announcements (Indigo aircraft acquisition and Reliance refinery expansion). Stalled projects flattened, but remained high at 11.6% of projects under implementation (11.8% earlier), mainly due to lack of funds. Projects completed at Rs1,373bn too were flat yoy at 1.2% of projects under implementation, as weakness in power and transport services offset the uptick in manufacturing and construction. Most lead indicators improved last month, with ordering activity seeing an uptick on a low base and weak 1HFY20 activity.

While CMIE and some lead indicators reflect marginal improvement on a low base, we believe the depth is weak. The sustainability needs to be monitored over the next few quarters. We expect investment cycle to pickup gradually led by uptick in govt spend and resolution of liquidity issues. We prefer Crompton Consumer (focus on premium products & cost efficiencies), Engineers India (early beneficiary of hydrocarbon capex) and KEC Intl (diversified backlog with exposure to power T&D, railway capex and EPC).