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Results and management commentaries of the key 25 companies across industrials, defense, and railways demonstrated sustained base ordering activity, along with a strong prospect pipeline for transmission, defense, and renewables, despite the absence of large orders during the quarter. Private sector ordering remained sluggish. Capital expenditure (capex) by major central public sector enterprises and four key government bodies increased 2.5% YoY during Apr-Jul’25. We will closely monitor government capex for the full year. The margin trajectory remained fairly strong, and companies are optimistic about overall exports. The sector is positioned at a juncture where valuation re-rating is difficult from current levels, while growth-oriented stocks will continue to attract investor interest. Stocks in key themes such as T&D, renewable, and defense remain our preferred bets, while pure capex-oriented stocks are witnessing delays in order finalizations. Therefore, we maintain our selective stance and prefer stocks such as L&T, KKC, and Siemens Energy in the large-cap industrial space and KOEL and KPIL in the mid- and small-cap segments. BEL continues to remain our top pick in the defense sector.

Healthy sector performance in terms of profitability

In 1QFY26, the aggregate revenue growth of our coverage universe stood at 15% YoY, and with broadly stable margin performance, the capital goods sector delivered a stronger-than-expected PAT performance. Notable examples were L&T, KKC, KOEL, TMX, KPIL, KEC, BHE, and HAL. Hitachi Energy reported a broadly in-line quarter. Executions for ABB and Siemens were in line with our expectations, though lower-than-expected margins weighed on PAT. TRIV and ZEN were hit by deferred dispatches and design modifications. Overall, revenue visibility remains strong for EPC, T&D, and defense players, but it is limited for capex-oriented players.

Margins broadly flat YoY due to benign commodity prices

For our coverage universe, overall margins were broadly in line with our estimates at ~12% (vs. 11.8% in 1QFY25). The change in revenue mix led to a slight contraction in margins for EPC (9.6% in 1QFY26 vs 9.8% in 1QFY25) and product companies (18.9% in 1QFY26 vs 17.4% in 1QFY25). Companies such as ENRIN, POWERIND, KKC, KOEL (adj. margins), TMX, KECI, and BHE reported healthy margin expansion in 1QFY26, while LT and KPIL were broadly flat. In contrast, TRIV, SIEM, ABB, and ZEN reported a YoY contraction in margins.

Ordering to accelerate on strong prospects

Order inflow growth for the capital goods sector was mixed, with continued momentum in power T&D and renewables and a gradual uptick in defense, while private capex remained weak. Overall, inflows of EPC companies jumped 28% YoY, mainly driven by LT and KPIL. The capex-oriented companies such as ABB, SIEM, TMX, and TRIV were hit by delayed decision-making in the private sector and lower ordering from exports. We believe that the Indian defense ordering pipeline will remain strong in the near term on account of emergency procurement, as well as for the medium-to-long term, led by both base and large-sized orders. Overall, power, T&D, renewable energy, data centers, real estate, defense, etc., continue to experience healthy traction, while we will monitor government and private capex trajectory in the coming quarters.

Export performance was a mix of both up-fronting and demand revival

Export performance has improved for companies across the product as well as the EPC segments. Company managements have indicated that it is a broad-based revival that they have witnessed in export markets, and this is not just related to the up-fronting of exports due to the US tariff implementation. For Cummins, Hitachi Energy, GE T&D, and KOEL, exports have witnessed a good improvement, and management commentary is also sanguine. Triveni Turbine’s export inflows were weak during the quarter due to geopolitical issues and deferral of decision-making from international clients. For EPC players, LT witnessed strong inflows from international geographies during the quarter. LT’s international revenue accounted for 52% of total revenue. In terms of order book, LT/KPIL/KEC’s international share stood at 46%/40%/35% of the total order book. Defense companies are actively scouting for opportunities in export markets such as Southeast Asia, Europe, the Middle East, Africa, Latin America, et al.

Key future monitorables

During the last quarter, we witnessed that the powergen market stabilized, defense emergency procurement was going on, and beyond that, large-sized defense orders were in the finalization stage, as well as the prospect pipeline on T&D continued to remain strong. We would keenly monitor the key capex drivers in both the government and private sectors.

Our recommendations

The sector is positioned at a juncture where valuation re-rating is difficult from current levels, while the growth-oriented stocks will continue to remain on the investment radar. Stocks in key themes such as T&D, renewable, and defense remain preferred bets, while pure capex-oriented stocks are experiencing delays in order finalizations. Therefore, we maintain our selective stance and prefer stocks such as L&T, KKC, and Siemens Energy in the large-cap industrial space and KOEL and KPIL in the mid- and small-cap segments. BEL continues to remain our top pick in the defense sector.

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