In This Article:
Sterling Tools Limited (NSE:STERTOOLS), a ₹13.06b small-cap, operates in the machinery manufacturing industry, which faces increasing demand of capital equipment and machinery from developing economies in Asia, Latin America and the Middle East. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 16.2% in the upcoming year , and a whopping growth of 49.7% over the next couple of years. the growth rate of the Indian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Sterling Tools is a laggard or leader relative to its capital goods peers.
See our latest analysis for Sterling Tools
What’s the catalyst for Sterling Tools’s sector growth?
Machinery manufacturers face the challenge of managing a plethora of new data so that it becomes useful, adapt technology to run their supply chains more efficiently. In the previous year, the industry saw growth in the twenties, beating the Indian market growth of 21.8%. Sterling Tools is neither a lagger nor a leader, and has been growing in-line with its industry peers at around 25.4% in the prior year. Furthermore, analysts are expecting the company to continue to grow with its industry peers and deliver a 14.9% growth next year.
Is Sterling Tools and the sector relatively cheap?
The machinery industry is trading at a PE ratio of 20.83x, in-line with the Indian stock market PE of 19.33x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 11.9% compared to the market’s 9.3%, potentially illustrative of past tailwinds. On the stock-level, Sterling Tools is trading at a higher PE ratio of 26.88x, making it more expensive than the average machinery stock. In terms of returns, Sterling Tools generated 20.1% in the past year, which is 8.2% over the machinery sector.
Next Steps:
Sterling Tools is machinery industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If Sterling Tools has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the capital goods sector. However, before you make a decision on the stock, I suggest you look at Sterling Tools’s fundamentals in order to build a holistic investment thesis.