Sector update: Capital Goods - Investment cycle weak
CMIE’s capex data shows sustained weakness, with a sluggish capex cycle across parameters in Q1FY20. New announcements fell to a 15-year low of Rs461bn (-87% yoy). The quarterly slowdown in new announcements is across sectors, both public and private, likely led by uncertainty in general elections, consumption slowdown and ongoing liquidity crisis at NBFCs. Stalled projects inched up to 11.7% of projects under implementation (10.9% earlier). Projects completed fell 59% yoy to 0.5% of projects under implementation at Rs546bn, largely led by ~77% yoy decline in road transportation and electricity.
Lead indicators reflected weak end-user demand, with muted growth or decline across MHCV sales, port, and rail volumes, cement production, etc. The weakness was reflected with most end user prices seeing declining trends. We expect investment cycle to recover and see pickup once government spend resumes and NBFC liquidity crunch is resolved. We prefer Engineers India (EIL; early beneficiary of hydrocarbon capex) and KEC International (beneficiary of power T&D and railway capex).
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