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T&D, Renewable, Defense continue to shine

Our analysis of management commentaries of 25 companies across industrials, defense, and railways after 4QFY25 results indicates that ordering activity from renewables, T&D, electronics, and B&F continues to grow at a fast pace while there are expectations that a broad-based demand revival from the government and private sector will happen in the coming quarters. Government-oriented sectors such as road and railways saw lower ordering activity in 4QFY25, while defense sector ordering is expected to revive in the coming quarters. As per the data on central government capex, a sharp uptick was seen in Mar’25 and Apr’25 across key segments. Private sector ordering too remained weak during the quarter, and enquiry pipelines are further shifted by a quarter. Going ahead, we will watch out for: 1) the finalization of an emergency procurement pipeline for the defense sector as well as contracts for large projects, 2) growth in segments other than Electrification/Energy for players like ABB and Siemens and also from government capex, 3) the conversion of inquiries to orders for private sector companies like Thermax and Triveni Turbine, and 4) stability in the powergen market for players like Cummins and KOEL. We remain selective on the sector and maintain our positive stance on LT, KKC and Bharat Electronics in the large cap space and KOEL and KPIL in the mid- and small-cap segments.

Sector performance was good on profitability

During 4QFY25, PAT performance of LT, Cummins, KOEL, HAL, BEL, Zen, KEC and KPIL was ahead of our estimates, whereas Triveni Turbine and Thermax reported in-line performance. Execution for ABB underperformed versus our expectations, while inflows for both ABB and Siemens remained strong. For combined financials of Siemens, the energy segment’s financials were consolidated only for two months during the quarter. With healthy order inflows received for most players, revenue visibility remains fairly good.

EBITDA margin remained strong

Overall EBITDA margin particularly for product companies remained strong during the quarter, except in a few cases where legacy projects impacted margin. EPC companies also expect margin improvement as they close older projects with lower margins. With demand remaining soft in select segments such as those dependent on the private sector or select government sectors, we are already baking in 50- 150bp EBITDA margin contraction over the next few years.

Order inflow surprised positively

Order inflows for most companies remained strong in 4Q, aided by either international ordering in the renewables segment or domestic T&D segments or high-growth areas as reflected in inflows of LT, Hitachi Energy, KPIL, ABB, and Siemens. Along with this, the prospect pipeline also remains strong for companies in these segments – e.g., LT’s prospect pipeline is up 57% YoY particularly from international; Hitachi Energy’s prospect pipeline is still strong from upcoming HVDC projects and export orders; KEC and KPIL too expect to benefit from a strong T&D pipeline. Even though ordering from defense remained lower than the initial guidance for few players, the expected emergency procurement in the near term and the finalization of bigger platforms will be positive for defense companies. As expected, ordering from the government and private sectors remained weak during the quarter.

Govt. capex gains momentum in Mar’25 and Apr’25

As per our economy team’s report on capex growth (Link), the central government’s capital spending surged to the highest-ever monthly level of INR2.4t in Mar’25 (68% YoY) compared with INR1.4t in Mar’24, and capital spending of the central govt. stood at INR10.5t in FY25P (10.8% YoY), up from INR9.5t in FY24 (28.3% YoY), surpassing its revised capex target of INR10.2t. For FY26, the govt. has budgeted INR11.2t for capital spending (6.6% YoY). Moreover, the central government has front-loaded capex in the current financial year (FY26), spending INR1.6t in Apr’25, up 61% from INR992b in Apr’24, when spending was muted in the initial months due to elections. Based on the provisional data of 20 states, total capital spending of all the states grew at a three-year high rate of 22% YoY in FY25 vs. 21.2%/16.6% growth in FY24/FY23. Thus, total capital spending of all the states stood at INR9.9t in FY25 vs. INR8.1t in FY24. For FY26, it is budgeted at INR11.4t (14.9% YoY). If the positive trend in capex continues in the coming months, it will be positive for the sector particularly from the railways and defense sides.

Strong opportunities in international markets

Export performance is gradually improving for companies, with a hope to further benefit from increased exports to the US, Europe and the Middle East. EPC players are already benefiting from opportunities related to renewables and renewable transmission projects, and we expect a similar momentum to continue going forward. LT’s international revenue accounted for 49% of total revenue. In terms of order book, LT/KPIL/KEC’s international share stood at 46%/41%/33% of total order book. ABB’s exports were weak at 7% of sales during the quarter, while for Siemens, exports stood at nearly 11.5% of sales in 1HFY25. Siemens also intends to increase the share of exports in both Smart infrastructure and Mobility. Cummins is too ramping up exports and is cautiously evaluating export markets in light of the current geopolitical situation. Triveni Turbine is already strong on exports, with an export share of 48% in total revenues in FY25. Defense companies are eyeing bigger opportunities from exports of larger platforms such as Akash missile, MRSAM and defense control systems, where domestic companies have already established their product quality in the domestic markets.

Things to watch out for going forward

We have witnessed a continued ramp-up in ordering from T&D and renewables and a strong pipeline for the defense sector during the quarter. The powergen market too seems to be stabilizing on the high base of last year, with one more quarter left with a base of pre-buying led volumes; post which we expect volume growth to normalize. Going ahead, we will watch out for: 1) the finalization of an emergency procurement pipeline for the defense sector as well as contracts for large projects, 2) growth in segments other than Electrification/Energy for players like ABB and Siemens, 3) the conversion of inquiries to orders for private sector companies like Thermax and Triveni Turbine, and 4) stability in the powergen market for players like Cummins and KOEL, which had seen the impact of a high base of last year.

Recommendation

We prefer companies with a well-balanced revenue mix, control over margins, and the ability to maintain or improve growth profile going forward. We remain selective on the sector and maintain our positive stance on LT, KKC and Bharat Electronics in the large-cap space and KOEL and KPIL in the mid- and small-cap segments.

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