Capital Goods & Defense Sector Set for Stronger Ordering Momentum, but Rising Input Costs Could Pressure Margins: Motilal Oswal Financial Services
India’s capital goods and defense sectors are entering the second quarter of FY27 with strong execution momentum and a visible improvement in order inflows, even as elevated commodity prices and the continued West Asia crisis create pressure on costs and margins, according to a September 2026 results preview by Motilal Oswal Financial Services (MOFSL).
MOFSL expects companies under its coverage to report around 9.5% year-on-year revenue growth, 10.0% EBITDA growth and 9.8% profit growth in 2QFY27, with EBITDA margins broadly stable at 13.0%. The research firm expects execution to remain supported by robust existing order books, while fresh ordering is building up across power transmission and distribution, data centres, infrastructure and private-sector capital expenditure. At the same time, companies are expected to take calibrated price increases to partly offset the impact of higher raw material costs.
Ordering activity has picked up across several segments during 2QFY27. Larsen & Toubro announced inflows of around Rs1 trillion during the quarter, including three ultra-mega orders of more than Rs150 billion from the Middle East in its hydrocarbon business, along with two mega orders of Rs100–150 billion from NVIDIA for setting up an AI factory and NTPC for equipment for a thermal power plant. KEC International announced inflows of around Rs 36 billion, while Kalpataru Projects International secured orders worth more than Rs95 billion across domestic and export markets, primarily across power transmission and distribution, buildings and factories, oil and gas, and residential sectors.
The transmission segment is also showing renewed momentum after a temporary slowdown. Eight tenders were finalised and awarded to PGCIL and AESL during 2QFY27, while the Barmer II-South Kalamb HVDC project further strengthened the pipeline. The Union Cabinet’s approval of the Green Energy Corridor Phase-III scheme on September 30, with a capital outlay of Rs1.86 trillion, provides additional visibility to the medium-term transmission opportunity. The scheme includes Rs1.36 trillion for intra-state transmission systems to enable the evacuation of up to 135 GW of renewable energy, while Rs500 billion is earmarked for 50 GWh of battery energy storage systems.
The defense segment, meanwhile, has a strong pipeline despite relatively weak ordering during the quarter. Defense Acquisition Council approvals stood at Rs1.62 trillion in FY27 year-to-date, while total approvals of Rs13 trillion between FY25 and year-to-date FY27 have expanded the total addressable market for domestic players. MOFSL expects defense ordering to improve as these approved projects move towards finalisation. The opening up of missile production to Indian private players, along with approval for DRDO to transfer technologies for conventional missile systems to Indian industry for domestic production, could support greater private-sector participation and expand the addressable market.
The defense opportunity is also being supported by developments across key programmes. The deadline for submitting the RFP for the AMCA project has been shifted to October 30, 2026. In the aircraft segment, HAL’s management has committed to delivering 10 Tejas Mk-1A aircraft by March 2027, supported by 10 F404-IN20 engines received to date, 12 more engines committed by GE Aerospace by December 2026 and 27 completed airframes. MOFSL identifies QRSAM, Akash-NG, P75I, landing platform docks, next-generation corvettes and frigates, Mk-1A deliveries and AMCA developments as key areas to monitor, particularly with regard to higher private-sector participation.
However, rising input costs remain a key concern for the sector. Aluminium, copper, zinc and primary rebar prices remain elevated, up nearly 23%, 45%, 38% and 28% year-on-year respectively. Copper and zinc prices have also increased 7% and 11% quarter-on-quarter, although aluminium and primary rebar prices have corrected 10% and 6% respectively. Companies had already implemented price increases in 1QFY27 to offset higher commodity costs, which should partly cushion the impact on margins in the second quarter. Further price increases could follow depending on the demand environment, with the benefits expected to flow through to margins with a quarter’s lag.
The impact of higher costs, however, is likely to vary across companies. MOFSL sees greater risk to full-year margin estimates for companies with a larger share of fixed-price contracts, while companies with pricing power or variable-pricing contracts could be better positioned to navigate the current environment. The research firm therefore prefers companies benefiting from improving orders in areas such as transmission and distribution, data centres and defense, while also having the ability to manage rising raw material costs.
Export ordering is providing another source of support. Globally, spending priorities have shifted towards energy security, supply-chain security, defense and manpower resource mobilisation, with power transmission, data centres and defense emerging as key focus areas. During 2QFY27, Larsen & Toubro, Kalpataru Projects International and KEC International reported multiple large orders from the Middle East across power transmission and distribution, hydrocarbon and oil and gas. In defense, the Ministry of Defense has also simplified the defense export SOP and the Open General Export License framework, reducing procedural requirements for exporters and extending OGEL validity from two years to three years.
Against this backdrop, MOFSL believes the long-term sector thesis remains intact, with certain stocks having moved to more attractive valuations. The research firm prefers companies that are benefiting from improved ordering across growing themes and have pricing power or variable pricing contracts to manage the current raw material environment. It reiterates its positive stance on Larsen & Toubro, Cummins India and GE Vernova T&D in the large-cap segment, and Kirloskar Oil Engines and Kalpataru Projects International in the mid- and small-cap segments. Within defense,
Bharat Electronics remains its top pick.
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