Marvels of engineering can be expected to gear up

Tags: Stock Market
Here is a concrete example of what policy paralysis can do to a company. All segments in which Siemens operates in India — power generation, infrastructure or healthcare — are dependent on government spending and its policies for growth. Since government policy did not encourage private sector investments in these three sectors, companies like Siemens could not keep their wheels well oiled. No wonder, operational performance of the company declined in the last eight months. Yet it is precisely in this phase that the stock of Siemens moved up from a level of Rs 427 in August 2013 to a high of Rs 675 on Monday, a rise of 58 per cent. Not bad for a largecap stock when the company’s absolute numbers, both bottom and top line, were down. Even operating margins came under pressure between September 2013 and March 2014.

The divergence in fundamental and stock price performance is an indication that hope has played a big role in the stock’s fate in the past eight months.

Another big factor that keeps the capital goods sector humming along nicely is interest rates. Lower the rates, easier it is to kickstart projects. So what can be expected of interest rates under the new regime? If the new regime is fiscally prudent, there will be less pressure on RBI, which means interest rates could climb come down. The expectation is also that once a new government is formed, both private sector capex cycle and government spending would see an upturn.

This high co-relation between which coalition unfurls the victory flag on May 16 and growth prospects is precisely what makes Siemens a high beta stock the day of election results.

Now we come to the crucial question how sharp will be the rally in the stock if results match expectations of the street. We expect upmove in the stock to be stronger than in other capital goods stocks and many other high beta stocks, which had already gained sharply since August last.

So essentially, the stock of Siemens is a possible outperformer from the capital goods sector space. Remember, the stake of both foreign and domestic institutional investors in the company is not very high. Even if a little bit of institutional buying emerges either from a long-only fund or an ETF, there will be a sharp spike in the stock.

But what happens if the market declines? Yes, the stock would correct sharply for a day or two but soon after that it will likely enter into a range-bound mode. Th-at’s because the parent company is keen to improve its stake in the Indian subsidiary, which is already 75 per cent. So, any sharp decline can attracting investors who get into such MNC counters in the hope that one day a de-listing offer will come. These investors anchor the stock in extreme bearish phases.

(With research input by Amit Mudgill. The writer is director of independent brokerage Elan Equity Services and consulting editor of Financial Chronicle)

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