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We expect 1QFY27 performance to have some impact of slower execution due to West Asia crisis as well as labor unavailability due to election schedule in few states. Ordering momentum was also weak during 1QFY27. Government related ordering was also weak but initiatives such as fast tracking of defense procurement, faster DAC approvals, easing of norms for Chinese players to ease supply chain issues in transmission and tax holiday for data centres announced in budget seem to indicate focus on these sectors. In coming quarters, we expect the industrial sector to benefit from 1) improved ordering, 2) easing off of commodity prices and 3) normalization of labor availability and execution. Going ahead, we remain positive on areas where spending is happening such as transmission, data centre, defense and companies positioned in these segments. For 1QFY27, we estimate our coverage companies to report a revenue/EBITDA/PAT growth of ~5%/6%/10% YoY, with a broadly flat EBITDA margin. We reiterate our positive stance on LT/Cummins India/ GE Vernova T&D in the large-cap space, and Kirloskar Oil Engines/Kalpataru Projects International in the mid-cap and small-cap segments. In the defense sector, Bharat Electronics remains our top pick. We remain positive on Dixon too with expectations of mobile volumes ramping up in coming quarters.

Ordering activity was weak during 1QFY27 but is now building up

Ordering activity during the quarter was weak and was seen primarily across power T&D (domestic and international), metals, B&F, hydrocarbon and selectively for defense. Government sector ordering was weak, while private sector ordering has maintained the traction seen over last few quarters. Domestic tendering on large transmission projects was weaker, but bid submission is likely to improve from 2QFY27 for both state and central utilities. Among companies, LT’s announced inflows stood at ~INR252b with one mega order received from JSW Steel. KEC secured inflows worth INR66b and KPIL secured inflows worth INR50b diversified across domestic and international. Among product companies, KOEL recently announced a large data center-related order from HyperNext. Overall TAM continues to remain strong for product companies focusing on data center-related orders.

Defense: Pipeline remains healthy with large orders expected to finalize in near-to-medium term

Defense sector remains attractive as AoNs worth INR6-6.5t announced in FY26 are expected to get converted into orders FY27 onwards. DAC also approved another round of AoNs worth INR520b recently, including ‘Akash Tarang’ EW system, MRSAM, VSHORADS, MP-ATGM, etc. Also, under the revised Delegation of Financial Powers for the Defense Services (DFPDS) rules, the MoD has increased financial autonomy to fast-track more than INR1.3t worth central defense revenue procurement annually. This is likely to accelerate order inflows and execution for defense companies, as a larger share of procurement contracts can now be approved directly by the armed forces. During the quarter, BHE announced order inflows worth INR35b, including an order for ground-based mobile ELINT system (GBMES) for the Indian Army. BDL recently announced orders worth INR14b related to Helina launchers and CMDS LRUs. Key things to watch out are updates on orders for QRSAM, P75I submarine, next-generation corvettes, and delivery status of Tejas Mk1A aircrafts.

Correction in commodity prices is a key positive

Though commodity prices are still high on a YoY basis, the recent correction seen in key commodities is positive for companies focused on short-cycle or fixed-price contracts. On YoY basis, prices of aluminum/copper/zinc/HRC are still up nearly 23%/39%/34%/11%. Sharp spike in RM prices in Mar’26 will get reflected in lower margins in 1QFY27. Various companies had already taken price hikes to pass on the YoY increase in RM prices and we expect to see the partial impact of these in 1Q/2QFY27. However, sequentially, prices have now started correcting, which will be reflected from 3QFY27 onward in margins. On a blended basis, we expect EBITDA margin to remain broadly flat YoY but decline QoQ by 250bp in 1QFY27.

Export momentum to improve in coming quarters

Export or international execution for most players was affected by higher freight costs, and hence companies had selectively taken a stance on exports during 1QFY27. With the West Asia crisis easing out now and the reopening of channels, we expect exports to start witnessing improvement. Ordering activity from international markets too remained limited during the quarter. However, for EPC names, such as LT, KPIL and KECI, inflows are picking up now. For product companies, the US, Europe, the Middle East, and South Africa regions remain key export markets, and we expect opportunities to come from renewables, transformers and data centers, where companies are eyeing bigger orders. For defense players, exports are largely led by private defense players like Solar Industries, Astra Microwave, Data Patterns, etc. Pipeline and offerings for DPSUs for export markets remain healthy, though we are yet to see a meaningful pickup.

Sector View: Prefer sector and companies where macro drivers are intact

We remain positive on select themes where there is comfort on the visibility of multi-year capex such as transmission and distribution, data center and defense. Going ahead, we expect ordering and execution to improve as earlier issues related to supply and labor availability are getting addressed. We also expect the sector to benefit from a decline in commodity prices as well as freight rates. We would keep a continuous watch on government and private capex spending. Most companies have indicated that private capex has started reviving in select pockets of metals and mining, thermal, buildings, cement, etc.

Our top picks

We reiterate our positive stance on LT/Cummins India/GE Vernova T&D India in the large-cap space, and Kirloskar Oil Engines/Kalpataru Projects International in the mid-cap and small-cap segments. In the defense sector, Bharat Electronics remains our top pick. We remain positive on Dixon too, with expectations of mobile volumes ramping up in the coming quarters.

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