India Capital Goods : Investment activity sharply decelerated in the March quarter: Credit Suisse,

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India Capital Goods Sector ----------------------------------------------------------------------------------
Sector trends: Investment activity sharply decelerated in the March quarter

● CMIE project investment data for the March quarter suggests a
sharp decline in new project adds, suggesting weak investment
activity. Our database also suggests a 60% decline in March
quarter adds. (Figure 1)
● Aggregate inflows in FY11 declined YoY (Figure 2). We note that
the sector’s relative return largely correlates with the pace of
growth in investment adds (order inflows).
● CMIE data also indicated a significant decline in the pace of
commissioning of projects and an increase in the pace of projects
shelved during the quarter (compared to September and
December quarters).

● While we expect industrial and infra capex to remain in a
downturn in FY12 (fourth year of downturn), we note that rising
interest rates could potentially impact growth, higher than
anticipated. (We see risk to street order estimates for FY12.) Past
trends (Figure 5) suggest that stock price index declines during a
rising rate cycle.
● We remain UNDERWEIGHT capital goods sector with a few
stock-specific outperform ideas (CGL, Havells and Cummins).