GOLDEN RULES FOR TRADING

Capital Goods Stocks Outlook for the week – 26 to 30.10.2015 Seen weak, Jul-Sep earnings eyed

Capital Goods Stocks Outlook for the week – 26 to 30.10.2015
Seen weak, Jul-Sep earnings eyed

Stocks of capital goods companies are seen continuing to trade with a negative bias next
week as Jul-Sep corporate earnings of companies in the sector are seen dull. Energy and
environment equipment maker Thermax will report Jul-Sep earnings on Tuesday, while
electrical products maker Crompton Greaves will detail its results on Thursday. Sector
major Larsen & Toubro and state-owned Bharat Electronics will report their earnings On
Oct 30. Three of these four companies are seen reporting a decline in net profit.

Sluggish domestic orders in power, metallurgical and heavy equipment space is also seen
resulting in a fall in order booking for them in Jul-Sep. Crompton Greaves is seen
reporting consolidated net profit of 472 mln rupees, down 28% on year and net sales of
33.47 bln rupees, down 3% on year.

L&T too is also expected to report a decline in Jul-Sep consolidated net profit and report
a second consecutive quarter of decline in order inflows. In Apr-Jun, the company
reported a 21% decline in order inflows in contrast to its aim to achieve 15% growth in
order inflows in 2015-16 (Apr-Mar). If the sector bellwether L&T reports subdued order
inflows for Jul-Sep, it may have a negative impact on the shares of other companies in
the sector.

The government has released the draft of capital goods policy yesterday. Though the
policy seeks to provide export incentives and norms regarding localisation of equipment
within the world trade organisation framework, we do not see the development having
any near-term impact on the prevailing negative sentiment in the sector. Further, post the
Indian market hours yesterday, China announced it had cut its one-year lending rate and
one-year deposit rate by 25 basis points. This may add competitive pressure in heavy
equipment segment and further lend a blow to shares of Indian capital goods companies
next week.