Midcap Marvels of India's Capital Goods Sector.Delving Deeper into IRCON, MDL, and BEL.

Midcap Marvels of India's Capital Goods Sector.Delving Deeper into IRCON, MDL, and BEL.

"We are not a SEBI registered advisor, and this should be considered as a research case study only."

In 2023, India launched a budget of 550 billion dollars, with a goal to enhance the country's infrastructure and attract foreign investors. The government allocated a capex budget of 10 lakh crore, an increase of 33% from the previous year's budget. With these efforts, India aimed to boost economic growth and create investment opportunities.

As part of this growth story, we're here today to talk about investment opportunities in the capital goods sector. In our previous report, we discussed the booming Automobile sector, and now, we'll explore three stocks in the capital goods sector- IRCON International Limited and Mazagon Dock Shipbuilders Limited, Bharat Electronics limited.

To begin with, let's consider whether this capital expenditure (capex) budget is sufficient.

Not really. Currently, India’s capex budget is 3.3% of GDP, and the previous year it was 2.7%. It looks like a decent growth, but when China was in current India’s growth situation, it was spending almost 4%-5% of its GDP. However, India has begun investing heavily in transportation and infrastructure development, which has piqued the interest of foreign investors. This trend is expected to continue at a fast pace over the next 5-6 years.

When we consider transportation and infrastructure, railways are essential, as they account for a significant portion of industrial transportation. The government has allocated a record-high capital outlay of 2.41 Lakh crore to the railway sector this year, up from 1.40 Lakh crore in the previous year.

Ircon International Ltd(long-term pick)

The stock belongs to the midcap segment. IRCON International Limited is an engineering and construction Public Sector Undertaking (PSU) with having presence in various sectors, including railways and highways but mainly Railways.  In fact, a significant 92% of its revenue is derived from domestic railway projects. As such, it may be prudent to consider a longer-term view of 3 to 5 years when evaluating this stock.


Source: Trading view

This daily chart depicts the performance of IRCON International Limited, which shows a significant breakthrough from its tight consolidation phase of nearly three years in November 2022. The stock has completed a successful retest of the Darvas Box Breakout, indicating a higher probability of sustaining its current upward trend. Additionally, the stock is currently trading above the 200EMA, which further reinforces this trend. As the stock is presently trading at 57, it is advisable to consider a longer-term investment strategy.

Moreover, there are several compelling fundamental factors that support the breakout, providing additional confidence in the stock's future prospects.


Big Budget Allocation to Railway:-

The government has allocated a record-high capital outlay of INR 2.41 Lakh crore for the railway sector in 2023, which is significantly higher than the previous year's allocation and those of preceding years, as illustrated below.

Since IRCON International generates a significant portion of its revenue from railway projects, it is expected that the company's order book will grow substantially this year. As of June 2021, the order book stood at INR 34,300 Crore, and by June 2022, it had increased to INR 42,000 Crore.

Expected strong March Quarter Result:-

Given the expanding order book,, there is a strong possibility that the stock will deliver a robust performance in the upcoming March quarter. This is consistent with historical trends, as the stock has typically delivered a solid quarterly result in every March quarter.

Other Factors:-

The stock appears to have a strong fundamental foundation, as evidenced by its average sales growth of 19% over the past five years, coupled with net profit growth of 12%. Furthermore, this growth trajectory is expected to continue due to the government's emphasis on infrastructure development. The company's debt-to-equity ratio was 0.29, indicating a healthy financial position.

EPS of 7.22(TTM) and the low PE ratio of 7.45 of IRCON International Limited suggest that the company is generating earnings and is currently undervalued in the market as the industry PE is at 27x.

Despite these positive developments, there is some concern regarding the declining Operating Profit Margin (OPM). This could potentially be attributed to intensifying competition in the market.

Disclaimer: Please note that the following information is intended for educational purposes only and should not be construed as a recommendation to buy or sell any securities.

Current Market Price:- 57.45


Target:-76 above

Other Opportunities

Mazagon Dock Shipbuilders Ltd(Trading Pick)

Mazagon Dock Shipbuilders Limited(MDL) is a prominent player in the shipbuilding industry in India. Established in 1934, the company became a Public Sector Undertaking (PSU) in 1960. As per the latest available information, the company's market capitalization stands at INR 14,481 crores, placing it in the mid-cap segment.

Source: Trading View

This is a daily chart of Mazagon Dock Shipbuilders Limited (MDL), which was listed in October 2020. The stock has experienced a significant uptrend, surging nearly five times, supported by strong fundamentals. After a minor correction, it appears to be trading at an attractive level, finding support at its 200-day Exponential Moving Average (EMA). Recently, the stock has broken out of a falling wedge pattern, indicating a potential bullish signal.

Mazagon Dock Shipbuilders Limited (MDL) derives a significant portion of its profit, approximately 89%, from shipbuilding activities catering to both the Indian Navy and the commercial cargo and passenger ships sector. In addition, MDL holds a substantial 47% stake in Goa Shipyard Limited. MDL's stock is trading with commendable financial ratios, boasting a return on equity (ROE) of 19% and a return on capital employed (ROCE) of 25.5%. Furthermore, MDL is financially robust with ample cash reserves, earning significant interest income of 500-600 crores annually.

The stock is available at CMP 718; if traded stop loss can be at 650 and a target of 840.

Bharat Electronics Limited(Trading pick)

According to the daily chart of Bharat Electronics Limited, the stock is currently trading above its 200-day Exponential Moving Average (EMA), indicating that its uptrend is still intact. The stock has also formed a double bottom pattern with a higher low bottom, suggesting a bullish signal.

A potential entry point for traders could be around the 98 to 99 range, with a stop loss at 90 and a target price of around 112.

In addition to its technical indicators, Bharat Electronics Limited also boasts strong fundamentals. The company has a robust Return on Equity (ROE) of 21.95%, which reflects its financial strength. Furthermore, the company allocates a significant portion of its revenue, approximately 7%, towards Research and Development (R&D). This is noteworthy as the Indian government has increased its focus on the indigenous development of defence equipment, which is positively impacting the company's order book.

Disclaimer:-Please note that stock trading involves risks, and it is always recommended to conduct thorough research and consult with a qualified financial professional before making any investment decisions.

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