Whalesbook
Capital Goods Sector Navigates Shifting Investment Dynamics
Investors are closely scrutinizing third-quarter results and order inflow guidance from capital goods companies. The sector, historically reliant on government spending and exports, now seeks a robust pickup in domestic private sector investment. Central government capex growth has moderated, while global economic slowdown limits export potential for most firms.
Private Capex Outlook
Private capital expenditure typically follows consumption patterns with a delay. Analysts anticipate a potential uptick in private capex by the second half of fiscal year 2027 if consumption strengthens in the preceding months. Supportive macroeconomic conditions, including anticipated rate cuts and stable inflation, underpin this outlook. Emerging technology sectors like electronics manufacturing, renewable energy storage, electric vehicles (EVs), and green hydrogen are identified as key drivers for new private investments. Data centers also represent a growing area of focus.
Sectoral Performance and Challenges
New investments in traditional heavy industries such as metals, mining, cement, and oil and gas are seen as unlikely in the near term. These sectors are already operating at approximately 70-75 percent capacity, with ongoing expansion projects. However, rising raw material costs for commodities like copper, aluminum, and zinc pose a significant threat to profit margins.
Q3 Order Inflows and Revenue Expectations
Order inflows for most major capital goods companies, excluding Larsen & Toubro (L&T), saw a year-on-year decline in the third quarter of fiscal year 2026. Defence sector inflows also dropped, influenced by a strong base effect from the previous year. Despite this, overall revenues are projected to achieve low double-digit growth, potentially higher if the consumer electricals segment performs exceptionally well. Cumulative orders for major players (excluding L&T) stood at approximately ₹32,400 crore in Q3 FY26, marking a year-on-year decrease. Defence orders fell by 50 percent to ₹9,900 crore, largely due to Hindustan Aeronautics Ltd. (HAL) securing a substantial order in Q3 FY25. Conversely, capital goods orders saw a 12 percent rise. Adjusted for base effects, defence orders showed underlying growth.
Company-Specific Forecasts
For the third quarter, ABB India is expected to report a 9 percent year-on-year revenue increase, driven by strong execution in its electrification segment. Siemens' revenue may rise by 12 percent. Thermax and Cummins anticipate around 6 percent revenue growth. KEI Industries could see a significant jump of 25-30 percent, fueled by demand in cables and wires and rising copper prices leading to price hikes. KEC International's revenue is projected to grow in the mid-teens due to its transmission and distribution business. In defence, Bharat Dynamics forecasts a 16 percent revenue rise, while Garden Reach Shipbuilders & Engineers expects a 32 percent increase, reflecting the lumpy nature of ship deliveries. Bharat Electronics and HAL are likely to post high single-digit to low double-digit revenue growth.
The consumer electricals, durables, and electronics segments are poised for mid-teen year-on-year sales growth. Electronics, in particular, is a strong contributor, with room air conditioner companies expecting moderate sequential recovery. Kaynes Technology could report a substantial revenue jump of 45-50 percent, and Polycab anticipates a 25-30 percent spike due to cable and wire demand. Dixon and Havells are expected to show low double-digit growth.
L&T is well-positioned to benefit from opportunities in renewable energy, thermal power, overseas hydrocarbons, and defence. CG Power is also anticipated to deliver strong earnings growth, supported by demand from railways and its new outsourced semiconductor assembly and testing (OSAT) business. HAL, despite a large order backlog, faces execution challenges. GE Vernova T&D appears set to capitalize on the transmission and distribution capex cycle and increasing exports.