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After better-than-expected ordering in 1QFY25, we expect 2QFY25 ordering to improve for selective segments. Delayed decision-making in government projects and delays in the finalization of the private sector enquiry pipeline can impact companies focused on EPC and private capex. However, other fast-growing segments, such as data centers, transmission, electronics, and renewables, continue to boost inflows for companies. For the genset players, as highlighted in our recent note, despite the full transition to CPCB4+ norms and a sequential decline of 10-15% in genset volumes, revenue growth will be supported by strong prices. Overall, for the sector, we believe that strong order books provide healthy revenue visibility for companies. We expect 12% YoY growth in execution in 2QFY25. Margins should be in a stable range given benign commodity prices, cost-saving measures and an improved product mix. As a result, we expect a ~50bp YoY expansion in EBITDA margin for our coverage universe. For 2QFY25, we estimate our coverage companies to report revenue growth of 12% YoY, EBITDA growth of 15% YoY, and PAT growth of 13% YoY.

Order momentum panning out well for select segments

Ordering activity continued to be buoyant during the quarter, with healthy traction across sectors such as power T&D, data centers, renewable energy, real estate, buildings & factories, etc. However, domestic ordering has been muted for LT owing to delays in decision-making on account of impending state elections. Accordingly, LT announced orders worth ~INR218b, BHE won ~INR23b, KECI secured ~INR71b, and KPIL acquired ~INR70b worth of orders. We expect domestic ordering momentum to pick up after state elections. Defense sector ordering will also start ramping up from 3QFY25 onward. With strong existing order books, we estimate 12% YoY growth in execution in 2QFY25 for our coverage universe.

Benign RM inflation to ensure stable margin performance

We expect EPC companies to report a sequential recovery in margins as legacy projects are near completion and newer orders have been booked at prevailing RM levels. For product companies, we expect the improved margin trajectory to remain intact given strong demand, healthy pricing and benign commodity prices. Product companies are continuously focusing on high-margin areas, tech-led offerings, and deeper penetration in tier 3 and 4 markets; hence, they are benefiting from better pricing. After seeing an uptick, prices of key inputs have seen some easing. In recent months, copper/aluminum prices have eased by 2%/4%, while zinc prices have been flat vs. the Jun’24 level. Accordingly, we expect ~30bp YoY margin expansion in 2QFY25 for our coverage universe.

Sequential improvement underway in exports

Ordering from international geographies has remained healthy, mainly aided by the global thrust on renewable energy and investments in infrastructure during the quarter, which is reflected in inflows for LT, KECI and KPIL. However, continued tensions in the Middle East and crude price movements need to be monitored closely, as a recalibration in spending by GCC countries cannot be ruled out in case these events escalate. For companies like KKC, the past few quarters have seen muted export demand owing to geopolitical concerns, sluggish macroeconomic conditions, and economic slowdown in some countries. Select geographies, such as the Middle East, Africa and Latin America, have started improving sequentially. Other product companies, such as TRIV and KOEL, are clocking healthy export growth, in line with their international strategy.

We remain optimistic on long-term capex cycle

We believe that our long-term thesis on the capex cycle is intact, with policy continuity and a stable macro environment. The traction continues to be strong across sectors such as renewables, transmission, PLI and defense, wherein the government has already initiated policy measures, which provide long-term visibility. This, along with healthy bank and corporate balance sheets, should provide a fillip to private sector capex, which has hitherto been selective. Companies are sitting on healthy order books, which should provide visibility for a healthy revenue CAGR. We, thus, increase our estimates for select companies to factor in better margins and continued traction in fast-growing high-margin segments.

Our top picks

Our top picks in the sector are ABB, LT and BHE. We expect ABB to be the key beneficiary of an improved addressable market for short-cycle orders from the private sector as well as transmission, railways, data center, and PLI-led spending. We expect LT to continue to benefit from international spending and an expected revival in domestic spending, along with control over its working capital. We like BHE for its strong presence in defense electronics, ability to grow revenue and PAT in mid-teens CAGR, and improving return ratios.

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