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Fairly decent quarter with strong inflow momentum

Our analysis of the key 30 companies in the industrials, defense and railways segments indicates that 3QFY26 reflected a broadly positive outlook, with resilient profitability and steady ordering momentum. The outlook is supported by improved budgetary allocation for capex, continued spending across high-growth areas like renewables, data center and defense across both domestic and international markets, while private capex remains selective. Export outlook has improved after India-US and India-EU trade deals. Commodity price movements have been sharp and will have to be monitored regularly for any impact on margins. We continue to prefer companies with stronger execution growth and the ability to sustain margins amid commodity volatility. We reiterate our positive stance on LT, Cummins India (KKC), and Siemens Energy in the large-cap space and Kirloskar Oil Engines (KOEL) and Kalpataru Projects International (KPIL) in the mid-cap and small-cap segments. In the defense sector, Bharat Electronics (BHE) remains our top pick.

Profitability remains resilient despite softer execution growth

In 3QFY26, execution across our coverage universe was slightly below our estimates, with revenue rising 11% YoY (est. +16%), mainly due to weaker-than-expected execution at LT, SIEM and BDL. Among EPC players, we had expected LT’s core E&C revenues to ramp up from 3QFY26, which we believe would happen in the coming quarters. Most product companies reported in-line or better-than-expected execution. The quarterly performance of defense companies tends to be lumpy, with 4Q typically being the strongest quarter as a majority of government payments are released toward the end of the fiscal year. PAT was broadly ahead of our estimates, reflecting stable profitability.

Sustainability of order inflows to be seen

Ordering remained healthy in 3QFY26 across EPC projects from the Middle East, T&D, renewables, defense, real estate and data center, supporting base orders as well as large orders. The government has increased capex spending by 11% YoY for FY27, including a much higher 18% YoY growth in allocation for defense capex to INR2.2t. Along with this, AoNs worth ~INR6.9t accorded over YTDFY26 are also expected to convert into firm contracts over the next 2-3 years. Apart from this, private capex remains selective, driven by thermal, metals and mining, automobile and cement. New areas like renewables, grid expansion and data centers continue to see strength, aided by the proposed tax holiday for data centers until CY47. Going ahead, we will monitor broad-based capex growth and corresponding base order inflow traction for ABB, Siemens, Thermax and Triveni Turbine.

Sustainability of order inflows to be seen

Ordering remained healthy in 3QFY26 across EPC projects from the Middle East, T&D, renewables, defense, real estate and data center, supporting base orders as well as large orders. The government has increased capex spending by 11% YoY for FY27, including a much higher 18% YoY growth in allocation for defense capex to INR2.2t. Along with this, AoNs worth ~INR6.9t accorded over YTDFY26 are also expected to convert into firm contracts over the next 2-3 years. Apart from this, private capex remains selective, driven by thermal, metals and mining, automobile and cement. New areas like renewables, grid expansion and data centers continue to see strength, aided by the proposed tax holiday for data centers until CY47. Going ahead, we will monitor broad-based capex growth and corresponding base order inflow traction for ABB, Siemens, Thermax and Triveni Turbine.

Margins expanded YoY despite rising commodity costs

Overall margins improved to 13.1% (vs. our estimate of 12.9%), expanding ~70bp YoY. Both EPC and product companies reported YoY margin expansion, supported by operating leverage and improved mix. Margin performance was largely stable across defense companies, with compression limited to BDL due to weak execution. Commodity price pressures were highlighted by several companies, though largely mitigated through hedging and price-escalation clauses. Despite softer revenue growth, overall sector margin trends remain stable. While commodity price pressures could weigh on margins in the near term, most companies are expected to pass on these costs to customers with a lag of 2-3 months.

Export outlook turns positive after India-EU and India-US trade deals

Ordering activity for EPC players from international markets has been strong. For product companies, the export outlook, which was uncertain till sometime back, has improved after India-US and India-EU trade deals. Industrial and electronic exports saw volatility due to tariff changes and delayed order finalizations, which we believe will ease out now. Most companies are trying to capitalize on upcoming demand from data center and renewable infrastructure from the US and EU markets. For new capacity expansions across transformer companies, most players have earmarked nearly 25-30% of the output from incremental capacities for export markets, indicating upcoming demand from export markets. In defense too, export momentum is gradually improving, and the Defense Ministry has guided for defense exports to double over the next 4-5 years, though conversion timelines remain long.

Capacity expansion to cater to both domestic and export demand

Capacity expansion activity continues across the sector in transmission equipment, transformers, power generation, and rail manufacturing. Investments are focused on scaling transformer and HVDC capacities, expanding tower and hardware facilities, increasing powergen capacity, and adding capacity in data center segments. Most expansions are being undertaken in a phased manner and largely funded through internal accruals. Overall, these additions reflect steady demand visibility across power, infrastructure, railways and data center.

Limited impact from Chinese competition

Management commentary indicated that potential Chinese participation does not pose a material near-term threat. Current discussions are largely around selective component imports rather than full equipment, which may ease supply bottlenecks and support execution. Chinese players’ transformers capacities are running at full capacities to cater to their local demand as well as export markets such as Australia, the Middle East and Africa. Any meaningful entry would require Chinese players to set up a local manufacturing unit, regulatory approvals and product qualification, implying a long gestation period. As a result, pricing pressure remains limited and existing expansion plans are unlikely to be affected in the near term.

Key future monitorables

Key monitorables include 1) increased tendering activity on higher capital allocation in the union budget, 2) finalization of large-sized defense orders, for which AoNs have already been accorded, 3) broad-based recovery in private sector ordering, 4) improved export activities on recent trade deals, and 5) movement in commodity prices.

Our recommendations

We maintain our selective stance on the sector and prefer companies with stronger execution growth and the ability to sustain margins amid commodity volatility. We reiterate our positive stance on LT, KKC, and Siemens Energy in the large-cap space and KOEL and KPIL in the mid-cap and small-cap segments. In the defense sector, BHE remains our top pick.

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