Stocks to buy: IDBI Capital assigns ’buy’ rating to four capital goods stocks including Cummins, sees up to 24% upside

India is poised for substantial economic growth, aiming to become a $10 trillion economy within the next decade by adding $1 trillion every 1.5 years. The capital goods sector is expected to be a key driver of this expansion, a potential already recognized by the market in recent years due to significant capital expenditure (capex) initiatives supporting its growth. 

Government schemes like Gati Shakti, the National Infrastructure Pipeline, and Production Linked Incentive (PLI) schemes are driving infrastructure development and boosting manufacturing, which is forecasted to contribute 32 per cent to India's incremental GVA.

Recognizing the opportunities in this multi-year capex cycle, domestic brokerage firm IDBI Capital has initiated coverage on four capital goods stocks including Ador Welding, Voltamp Transformers, Kirloskar Oil Engines, and Cummins India, assigning them with a 'buy' rating. The brokerage recognizes that these companies are strategically positioned to capitalize on the opportunities presented by the ongoing capex surge. 

Capital goods stocks have surged over 100 per cent this year, continuing the momentum from last year's strong performance, leading them to trade at expensive valuations. Despite high valuations in the sector, IDBI Capital believes that there remains substantial growth potential for quality companies.

These firms are well-positioned to benefit from an ongoing multi-year capex cycle, which is expected to drive sustainable earnings growth and maintain premium valuations over the long term.

The brokerage had listed out some of the key drivers behind the manufacturing wave, including rising domestic demand due to higher disposable incomes, global realignment of supply chains, government-led PLI schemes to boost domestic production, high export potential positioning India as a global manufacturing hub, and a supportive financial ecosystem with increasing public and private capex.

Additionally, the country's demographic dividend and the reverse migration of skilled talent are expected to further drive this growth, it said. 

Ador Welding: Anticipates a 24% increase

IDBI Capital sets a target price of ₹1621 apiece for Ador Welding, which implies an upside potential of 24 per cent for the stock from its latest closing price. 

The brokerage projects the company's revenue, EBITDA, and PAT to clock growth of 11 per cent, 16 per cent, and 21 per cent CAGR, respectively, over FY24-FY27E as its revenue growth closely tracks the IIP growth. As the company is a major player in the welding industry, it expects Ador to grow 4-5 percentage points above the IIP growth for the consumables business, and the company, on average, has closely tracked this growth over the past decade.

IDBI believes the company is bound to be a natural beneficiary of robust domestic capex up-cycle owing to its healthy market share in both welding consumables and equipment space. Further, consolidation benefits of the merger with Ador Fontech and focused measures to narrow the product portfolio gap vs. ESAB are bound to gradually yield results, it noted. 

Voltamp Transformers: Forecasts a 23% upsurge

The brokerage noted that the stock has experienced significant re-rating over the past 15 months, driven by robust earnings growth, favorable sector trends, strong demand momentum, and disciplined financial management.

Healthy demand is anticipated, particularly from sectors such as renewables, new energy, electric vehicles (EVs), and data centers. The brokerage believes the company is well-positioned to capitalize on this growth, thanks to its strong relationships with private and industrial customers.

Consequently, the brokerage has assigned a 'buy' rating for the stock, setting a target price of ₹16,681, indicating a potential upside of 23 per cent.

Kirloskar Oil Engines: Predicts a 19.5% rise

According to the brokerage, the company enjoys a strong brand presence in the mid-range segment and is well-positioned to sustain its growth trajectory, driven by sectors such as residential and commercial real estate, hospitality, and data centers.

IDBI Capital has set a SOTP price target of ₹1,491 for the stock, reflecting a 19.5 per cent upside rally for the stock. 

Cummins: Projects an 16% growth potential

IDBI Capital noted that the stock price has surged sharply since the pandemic, driven by strong government initiatives aimed at revitalizing the manufacturing cycle in India. Despite current rich valuations, the brokerage sees a sustained demand trajectory for generators—both as standby and prime power sources for off-grid areas—supported by the ongoing capex cycle in the country.

Additionally, growth drivers such as exports and distribution are expected to further enhance performance. Consequently, the brokerage has set a target price of ₹4,401, reflecting a upside rally of 16 per cent. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.