Capital Goods Stocks in India

What are capital goods stocks?

Capital goods are the machines and equipment that businesses and governments buy to produce other goods and services - power equipment, transformers, cables, pumps, compressors, bearings, railway equipment, defence hardware and heavy machinery. Capital goods stocks are the listed companies that make them.

Because their customers are building factories, power plants, railways and defence capability, these companies are a play on investment in the economy - what economists call capital expenditure, or capex. When the government and private companies spend on new capacity, capital goods makers win orders.

What moves capital goods stocks

Government capex

Spending on railways, roads, power transmission, defence and urban infrastructure is announced in the Union Budget and flows into orders for these companies.

Private capex cycle

When industries run close to full capacity, they build new plants and buy equipment. That cycle can take years to turn, and capital goods stocks tend to move ahead of it.

Order inflow

New orders won in a quarter are a leading indicator of future revenue. Large order announcements often move these shares on the day they are disclosed.

Defence indigenisation

The government's push to make defence equipment in India, including lists of items that can only be bought from domestic suppliers, has become a major source of orders for defence manufacturers.

What to check before investing in capital goods stocks

Order book

The value of orders won but not yet delivered. Divide it by annual revenue to get the book-to-bill ratio: a ratio of 3 means roughly three years of work already in hand.

Execution

A large order book only turns into profit if the company delivers on time. Compare revenue growth with the order book to see whether execution is keeping up.

Working capital

Capital goods companies often wait months to be paid, especially by government customers. Rising receivables and inventory tie up cash; watch operating cash flow, not just profit.

Margins on fixed-price orders

When an order's price is fixed but the cost of steel, copper or components rises during execution, margins fall. Price-variation clauses protect some contracts but not all.

Risks to know

Capital goods is a cyclical sector. When investment slows, order inflow dries up and the stocks can fall sharply - and because these shares often trade at high valuations when the cycle is strong, the fall can be steep. Delays in government payments, cost overruns and project cancellations are the other common risks.

How to invest in capital goods stocks

1. 1

   Open a demat and trading account

   A demat account holds your shares electronically; a trading account lets you buy and sell them. With GoPocket you can open both online in a few minutes with your PAN, Aadhaar and bank details.

2. 2

   Add money

   Transfer funds to your trading account by UPI or net banking.

3. 3

   Research the company

   Pick a company from the list above and open its page to see its share price chart, financial performance and shareholding before you decide. Compare it with other capital goods stocks on business quality, debt, growth and valuation.

4. 4

   Place your order

   Search for the stock in the GoPocket app or web platform, choose the quantity, and place a delivery order to hold the shares in your demat account. A limit order lets you set the most you are willing to pay.

5. 5

   Track and review

   Follow the company's quarterly results and news. Spreading your money across several companies and sectors reduces the damage if one investment goes wrong.

Terms used on this page

LTP

Last traded price - the price at which the stock last changed hands. The figure below it is the change from the previous day's close.

Market cap

Market capitalisation: share price multiplied by the number of shares issued. It measures a company's size in the market and is shown here in rupees crore (1 crore = 1,00,00,000).

Cap band

Whether a company is large, mid, small or micro cap, based on its market capitalisation. Larger companies tend to be less volatile.

Sector and industry

The NSE groups companies into broad sectors (such as Financial Services) and narrower industries within them (such as Banks), based on what they mainly do.

Trading graph

How the share price has moved during the latest trading session, from the 9:15 open to the 3:30 close. The dashed line is the previous day's closing price.