FPIs tune in to hum of capital goods as capex cycle turns

ET Intelligence Group: Foreign portfolio investors (FPIs) are increasingly turning bullish on India’s capital goods sector as rising revenue visibility and growth guidance for infrastructure companies, a bulging order book and a large prospective order pipeline point to evidence of a reversal in the capex cycle.The attractive relative valuation compared with benchmark indices may keep them hooked on to the sector in the medium term.Allocation to the capital goods sector rose to 4.08 per cent in February, the highest level in over three years. FPIs have raised the weightage of the sector by a sharp 125 bps in a year, barrelling it to the top five sectoral holdings. The sectors with the highest FPI holding are financial services, followed by software, oil & gas and auto.On a year-to-date basis ending February, capital goods sector stocks received cumulative inflows of $448 million (Rs 3,270 crore), equivalent to 7.21 per cent of total FPI inflows in the same period.FPIs’ assets under management in the capital goods sector rose by a record 95 per cent to $22.4 billion (1.61 lakh crore) during the past year, show NSDL data. Total FPI AUMs rose 37 per cent in the same period.81384415They are currently overweight 46 bps on the sector based on the weightage of capital goods in the BSE 200 index.Their peak allocation to the capital goods sector stood at 6.6 per cent in January 2012. That weightage fell to 2.63 per cent in July 2020 and thereafter it has been improving on a month-on-month basis.Among stocks in the sector, FPI holdings in India’s largest infrastructure company Larsen & Toubro rose to 21.11 per cent in the quarter ending December 2020 from 18.78 per cent a year ago, show BSE data.The order book of the top 30 engineering and construction (E&C)companies touched $117 billion at the end of the December 2020 quarter, which provides revenue visibility of over three years, according to CLSA.Besides, capex plans of the Union and state governments suggest a buoyant order book. The Union government has hiked capex allocation by 35 per cent in the budget for FY22. Uttar Pradesh and Bihar, too, hiked allocations for road projects by significant amounts in their FY22 budgets.L&T projected a prospective order pipeline of Rs 2.75 lakh crore in the last quarter of FY21. Consequently, the Street is expecting order inflows to be close to the FY20 levels despite the sharp contraction in inflows during the first half of the year.
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