Capital Goods Sector Update : Mixed quarter amid Middle East disruptions by Prabhudas Lilladher Ltd
Quick Pointers
* Revenue/EBITDA growth of ~10.6%/6.9% YoY led by healthy execution in T&D-led product companies with some softness expected in defense & EPC amid geopolitical uncertainties
* EPC companies with Middle East exposure likely to face execution slippages and supply chain disruptions, affecting their international business performance
We expect our capital goods coverage universe to report mixed performance in Q4FY26 driven by (1) healthy execution momentum across T&D-led product companies; (2) strong domestic execution for T&D-focused EPC players, while international business may face headwinds amid ongoing Middle East geopolitical tensions; (3) some softness in defense segment due to supply chain disruptions, but strong order visibility; (4) continued sluggishness in export-oriented businesses due to delays in dispatches and order finalization amid the Middle East conflict; and (5) persistent softness in consumables companies. Overall, we expect Q4FY26 revenue/EBITDA growth of 10.6%/6.9% YoY (12.4%/6.6% YoY ex-L&T), led by healthy execution in T&D-led product companies, partly offset by softness in defense and EPC segments. Geopolitical tensions lead to slippage in execution, supply chain disruptions and delay in order finalizations, which are likely to impact the export business of many of our coverage companies. Our top picks are Larsen & Toubro, Ingersoll-Rand India and Voltamp Transformers.
Order inflows (OI) in Q4FY26 are likely to remain healthy, driven by T&D, B&F, data centers and energy transition projects along with defense companies, which continue to witness strong traction. In Q4FY26, L&T announced OI in the range of INR90-200bn led by major wins in power transmission, civil engineering, and minerals & metals, while KEC/Kalpataru have announced OI worth INR45.5bn /INR31.9bn till date. BHEL announced order intake of INR244bn, of which INR135bn was for the main plant package of 3×800MW Telangana Stage-II STPP from NTPC. Among the product companies, Thermax secured a boiler package order worth INR16bn for an ultra-supercritical thermal power project. In the defense segment, activity remains steady with BEL announcing OI worth INR125.5bn orders for Q4FY26 (INR301bn for FY26) and HAL, INR70.1bn (cal. ~INR1trn for FY26). While enquiry pipelines remain robust, driven by power T&D, data center, B&F and defense companies, we remain watchful of order conversion, particularly in export markets such as the Middle East and SAARC, given ongoing geopolitical uncertainties, which may impact order finalization for EPC and industrial machinery players.
T&D-related product companies are expected to grow at ~26% YoY driven by ~52%/~32% YoY growth in GVTD/Hitachi Energy India owing to strong domestic T&D demand and execution. EBITDA margin is likely to expand driven by a favorable revenue mix and operating leverage. OI for T&D product companies is expected to be driven by data centers, power T&D, electronics, etc.
Industrial machinery companies are expected to report moderate revenue growth of ~10% YoY due to healthy domestic demand being offset by weakness in export markets and delays in order finalization amid ongoing geopolitical tensions. EBITDA margin is likely to witness a YoY contraction, due to an unfavorable revenue mix and higher other expenses. Overall, while domestic demand remains relatively stable, near-term performance is expected to remain subdued due to export headwinds and execution delays.
Project companies are expected to report modest revenue growth of ~10% YoY, supported by healthy execution in the domestic market, partially offset by potential marginal execution disruptions in the Middle East amid ongoing geopolitical tensions. EBITDA margin likely to decline due to weaker operating leverage. Domestic OI remained steady throughout the quarter, while international inflows were healthy until Feb’26 but have seen some slowdown thereafter, particularly in the Middle East, due to the evolving geopolitical situation. However, we remain watchful on overall execution in Middle East given exposure of these companies and continued labor shortages reported by some of the EPC players.
Revenue of industrial consumables companies is likely to grow ~8% YoY, due to weaker exports (muted performance from international subsidiaries) and continued threat from Chinese dumping, despite resilient domestic demand. EBITDA margin is likely to expand due to weaker operating leverage being offset by better gross margin.
Defense companies are likely to report revenue growth of ~2% YoY due to ongoing supply chain disruptions amid geopolitical tensions. EBITDA margin is likely to contract due to an unfavorable mix. BEL announced OI worth INR125.5bn for Q4FY26 (INR301bn for FY26) with a major order of ~INR68bn, which includes a mountain radar order from the Ministry of Defence (INR20bn), avionics package for LCA and other key exports order. HAL announced OI worth INR70.1bn in Q4FY26, including INR18bn order for Dhruv, INR23bn order for Dornier and INR29bn order for ALH Mk-III (cal. ~INR1trn for FY26). AoN approved by DAC for FY26 stands at ~INR9.8trn, with Mar’26 AoN of ~INR2.4trn expected to translate into incremental OI, with BEL, HAL, etc., being key beneficiaries. Continued policy thrust on defense indigenization should further support sustained order booking momentum across multiple platforms and programs like ALH, AMCA and QRSAM.
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