I am currently reading and analysing the capital goods, power and projects industry as a whole. The reason for studying them together is that several companies in the above sectors overlap or are suppliers to the companies in the other sector. For ex: BHEL (capital goods) is a supplier to the Power industry (ex: NTPC).
I will post a detailed analysis later. However a few points stand out
- The capital goods and projects (such as L&T, ABB etc) industry is firing on all cylinders. They are growing a high rates, have high big order books and a high return on capital.
- The market is valuing these companies at 40-50 times earnings. Somehow everyone has forgotten that the above industries are cylical (remember 1999-2002?) and the cycle can turn downwards too. In that event, the stocks can get whacked badly.
- Competition is increasing as india is becoming a major source of demand globally. Increased competition is never good for profits and valuation