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Preference remains for growth companies

Results and management commentaries of the key 30 companies in the industrials, defense, and railways segments demonstrated that base ordering for capex-oriented stocks remained quite low in 2QFY26, though ordering activity was stable from the transmission, defense, and renewable segments. Large orders were missing during the quarter, except for LT. We maintain our selective stance on the sector and prefer companies that are able to grow well in the current environment and have the ability to sustain margins and PAT growth. We continue to prefer L&T, KKC, and Siemens Energy in the large-cap industrial space and KOEL and KPIL in the mid- and small-cap segments. BEL remains our top pick in the defense sector. These companies have continued to deliver strong performance than their relevant peers.

Sector performance was good in terms of profitability

In 2QFY26, execution across our coverage universe was broadly in line with our expectations, growing 14% YoY vs. our estimate of 15%. Supported by stable margins, the capital goods sector delivered a stronger-than-expected PAT performance, led by POWERIND, BHE, TRIV, KKC, KOEL, BDL and ZEN. PAT performance for LT, KPIL, ABB and HAL was largely in line vs. our estimate, while KECI and SIEM reported a slight miss. TMX performance was impacted by project cost overruns, while ENRIN performance was hit by a shift toward a higher share of project business. Overall, revenue visibility remains strong for EPC and defense players, aided by strong order books, while private capex-led companies are yet to see a broad-based pickup.

Margins broadly flat YoY but commodity prices have started moving up

Overall margins were broadly in line with expectations at 12.5% (vs. our estimate of 12.4%). A softer revenue mix drove a slight YoY margin dip for EPC players (9.7% vs. 9.9%) and product companies (19.1% vs. 19.6%). Defense players saw margin contraction due to lumpy execution, but full-year margins should improve as delivery schedules normalize and indigenization gains traction. POWERIND, KKC, KOEL (adjusted) and KECI delivered healthy margin expansion; LT, SIEM, ENRIN, KPIL, TRIV and ZEN were broadly stable; and HAL, BHE, BDL, ABB and TMX posted YoY margin contraction.

Ordering to further improve in 2H

Ordering activity trend in 2QFY26 remained similar to 1QFY26 as base ordering from private capex remained weak, while the momentum continued in the power T&D, renewables, and defense sectors. EPC players delivered strong inflows, with LT and KECI reporting strong double-digit traction and KPIL maintaining steady single-digit growth amid timing delays in tender awards. Product companies such as TMX and Triveni saw softer international order activity due to geopolitical issues, though domestic demand stayed resilient. Powergen volumes for KKC and KOEL remained strong during 2QFY26, with KKC returning to pre-CPCB IV+ levels and KOEL benefiting from a broad-based demand revival. Defense ordering is expected to improve further in 2HFY26.

Export traction strengthening; outlook set to improve

Exports improved during 2QFY26, supported by strong demand from the US, Europe and the Middle East, along with higher tendering activity across utilities, T&D, data centers and defense systems. Opportunities are expanding as the acceptance of Indian equipment rises in developed markets and traction builds across the infrastructure and energy transition segments. EPC companies are witnessing strong international momentum, with LT’s overseas order book standing at 51% of total orders, while KEC and Kalpataru continue to benefit from strong demand across key global markets. In powergen, KOEL and KKC saw improving export traction, with KOEL being led by MENA demand and KKC delivering 24% YoY export growth. Defense companies highlighted a strengthening export pipeline, supported by rising enquiries for missiles, radars, naval platforms and ammunition. Management commentary remains positive, with expectations of a pickup in 2HFY26 as tendering activity improves and regional demand visibility strengthens.

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 remained strong. We would keenly monitor the key capex drivers in both the government and private sectors.

Our recommendations

We maintain our selective stance on the sector and prefer companies that are able to grow well in the current environment and have the ability to sustain margins and PAT growth. We continue to prefer L&T, KKC, and Siemens Energy in the large-cap industrial space and KOEL and KPIL in the mid- and small-cap segments. BEL remains our top pick in the defense sector. These companies have continued to deliver strong performance than their relevant peers.

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