Capital Goods Stocks Out of Favor

Fri, 12 Feb 01:30 pm

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After opening the day flat, the Indian indices went on to book losses and have continued to remain under pressure in the post noon trading session. Sectoral indices are trading on a negative note with stocks from the capital goods, oil & gas and realty sectors bearing the maximum brunt.

The BSE Sensex is trading lower by 58 points (down 0.3%) and the NSE Nifty is trading down by 17 points (down 0.2%). The BSE Mid Cap index is trading lower by 1.4% while the BSE Small Cap index is trading down by 2.4%. Gold prices, per 10 grams, are trading at Rs 29,700 levels. Silver price, per kilogram, is trading at Rs 38,082 levels. Crude oil is trading at Rs 1,877 per barrel. The rupee is trading at 68.36 to the US$.

Energy stocks are trading on a negative note with Indian Oil Corporation and BPCL leading the losses. Oil and Natural Gas Corporation (ONGC) has reported its results for the quarter ended December 31, 2015. The company has posted a 64% YoY decline in its net profit to Rs 12 billion during the period. The fall was on the back of crude oil price slump and provisioning for impairment of assets. The company reported that Rs 39 billion has been provided as impairment loss provision excluding which the profit for the quarter would have been at Rs 38 billion. Total income of the company also dipped 5% YoY to Rs 193 billion.

The company's gross realisations dipped to US$ 44.34 per barrel during the quarter from US$ 75.97 per barrel in the year-ago quarter. However, after the government exempted ONGC from sharing the subsidy burden of downstream oil firms in the third quarter, net realisation at US$ 44.34 per barrel was higher than the net realisation of US$ 35.52 per barrel of the corresponding quarter of 2014-15.

It shall be noted that the company has written to the government for a reasonable gas price to make its key project off the eastern coast- KG DWN 98/2- viable. The company is of the view that without a reasonable return on investment, it will not be able to invest in this project. However, the company's management said that it will continue to make investments in other projects and look for acquisitions overseas because it believes that crude oil prices will again go up. The company has a cash reserve of Rs 140 billion.

On a separate note, ONGC is looking out for cheaper drilling contracts for its western offshore fields. This comes as a part of the company's biggest ever cost-saving drive in response to lower crude prices. The company wants to end existing expensive contracts for drilling rigs signed in the FY15 when crude prices averaged US$ 85 a barrel and to sign new ones at a lower price. If this strategy succeeds then it will help the company save Rs 5-10 billion a year.

ONGC's average cost of production in the western offshore fields is about US$40 per barrel. As per the sources, with ONGCs additional investments in the near future, it expects the average cost of production at Mumbai High, the most productive field in the western offshore area, to go up to US$ 44-45 a barrel. Presently the stock of ONGC is trading down by 4.6%.

Stocks in the engineering space are trading on a negative note with Opto Circuits and Bharat Heavy Electricals (BHEL) leading the losses. BHEL too has reported results for third quarter ended December 31, 2015.

The company has reported a net loss of Rs 11 billion during the quarter as compared to net profit of Rs 2 billion for the same quarter in the previous year. The company's total income has decreased by 15% YoY to Rs 54 billion for the quarter.

On a separate note, the company has won a Rs 35 billion order from NTPC for supply of power equipment. As per the deal, BHEL will set up two 800 MW steam generator island package at Telangana Super Thermal Power Project. BHEL's scope of work involves design, engineering, manufacture, supply, construction, erection, testing & commissioning and civil works for the Steam Generator island package.

BHEL is the largest engineering and manufacturing organisation in India. It is also among the world's few integrated power plant equipment manufacturers with the capability to manufacture the entire range/type of power equipment and also to undertake projects on EPC (engineering procurement construction) basis. Presently the stock of the company is trading down by 12%.

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