Capital goods stocks rebound after 2-day slide, still well below recent highs | Stock Market News

Capital goods stocks witnessed a sharp rally in today’s trade, February 4, after being beaten down following the Union Budget 2025, due to concerns over weaker capex allocation. The BSE Cap Goods index ended today’s session with a gain of 3.42%. 

Twenty-one out of 30 constituents of the index finished Tuesday’s session in the green, with ABB India emerging as the top gainer, rallying 8.3%, followed by Cummins India, HAL, BHEL, Inox Wind, Larsen & Toubro, Bharat Electronics, Siemens, and NBCC (India), all concluding the session with gains of between 3% and 6%.

Stocks still below recent highs

Despite a relief rally seen in today’s session, these stocks are trading at sharp discounts from their recent peaks. For instance, ABB is currently trading 40% below its recent all-time high of ₹9,149 apiece, while Cummins is trading 31% below its recent peak of ₹4,171 apiece. 

Some other stocks such as HAL, Bharat Dynamics, Thermax, Honeywell Automation, Inox Wind, Suzlon Energy, Elgi Equipments, Kalpataru Projects, and CG Power and Industrial Solutions are all down between 30% and 42% from their recent highs.

Capital goods stocks have faced selling pressure in recent months as the central government’s capex spending slowed in the current financial year. This slowdown raised expectations that the government might increase capex allocation in the Union Budget 2025, but those expectations were not met.

In the Union Budget for FY26, the aggregate capital expenditure of the Centre stood at ₹11.2 lakh crore, which is almost flat compared to the FY25 BE of ₹11.1 lakh crore. The budget also reduced the revised capital expenditure (capex) estimate for FY25 to ₹10.18 lakh crore.

The cut is attributed to slower capital spending during the first half of the fiscal year. According to the latest estimates, capex in FY25 stands at ₹5.13 lakh crore, 46% of the budgeted ₹11.1 lakh crore for April-November 2024.

Taking these revised estimates into account, the capex for FY26 has improved by 10%. Industry insiders were expecting the government to raise the capex allocation to ₹11.5 lakh crore amid a slowing Indian economy.

This 10% capex growth for FY26BE is also largely driven by higher allocations to other areas, such as innovation schemes, while allocations for roads and railways have remained flat for FY26BE.

For the first time in almost a decade, the government has focused more on consumption and savings rather than capex. Capital goods companies are closely linked to capital expenditure (capex) as their products and services are essential for large-scale infrastructure projects, manufacturing, and industrial expansion.

These companies play a crucial role in supporting various sectors of the economy, such as construction, infrastructure development, manufacturing, and energy production. 

Motilal Oswal cuts target multiples post budget

With weaker capex growth of 7.3% for FY25RE and 10% growth for FY26BE, domestic brokerage firm Motilal Oswal believes that the industrial sector will face challenges in growing inflows at the same pace as it did previously, when capex growth was 30% during FY21-24.

“We believe that it would be prudent to be selective now in the capital goods sector, focusing on companies that are relatively less impacted by slower growth in government capex or have created alternative growth areas that can, to some extent, offset the impact of slower government spending,” said the brokerage.

The brokerage has aligned its valuation multiples to account for lower valuations due to reduced government capex and lower-than-expected private capex so far. As a result, it downgraded Hitachi Energy to ‘sell’ from its earlier rating of ‘Neutral’ and has cut its price target on the stock to ₹10,500 from ₹13,300.

Thermax has also been downgraded by the brokerage to ‘Sell’ from ‘Neutral,’ with its price target reduced to ₹3,500 from ₹4,400. Siemens has been downgraded to “neutral” from ‘Buy,’ and its price target has been cut to ₹6,300 from ₹7,500.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.