A huge jump in order inflows has led to a fair amount of investment into the capital goods sector. Indeed, the BSE Capital Goods Index has risen by 5.5 per cent this year comfortably outperforming the Sensex and Nifty. The rise in orders is largely driven by policy initiatives from the government. There is the budgetary thrust on infrastructure and mining. The other is the emphasis on defence indigenisation coupled to the interest in the related aerospace and space sectors. In addition, there is some pickup in export orders for EPC companies like L&T and KEC Int.
The FPIs have started to bet big on this sector, after years of being underweight. Are the new valuations sustainable? Well, for one thing, the new valuations are based on clear visibility of revenues through the medium term given the full order books. However, they may be underestimating factors like potential delays and holdups as well as overestimating the potential margins. Commodity inflation for
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