Whalesbook
Capital Goods and Defence Sectors Poised for Strong Q3FY26 Execution
India's capital goods and defence sectors are set to sustain healthy execution momentum in the third quarter of fiscal year 2026. Motilal Oswal attributes this outlook to consistent strong order inflows and robust order books across key segments. While overall ordering activity is robust, encompassing thermal power, renewables, transmission & distribution (T&D), data centers, and defence, domestic private sector demand remains selective.
Government Capex Fuels Growth
Government capital expenditure has demonstrated healthy growth in the first eight months of FY26, significantly propelled by defence spending. Analysts anticipate an acceleration from the railways in the upcoming quarters. This trend also benefits from a comparatively low base recorded in the previous fiscal year. The brokerage further notes a promising export outlook for companies operating in the renewables and T&D segments, with select engineering, procurement, and construction (EPC) and product companies poised to benefit from international demand.
Financial Projections and Top Picks
Motilal Oswal projects revenue growth of approximately 16 per cent year-on-year for its coverage universe in Q3FY26. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) are expected to rise by 20 per cent year-on-year, with Profit After Tax (PAT) projected to grow by 24 per cent year-on-year. The brokerage maintains a positive stance on large-cap industrial players Cummins India, Siemens India, and Larsen & Toubro (L&T). In the mid- and small-cap space, Kirloskar Oil Engines (KOEL) and Kalpataru Projects International (KPIL) are preferred. Bharat Electronics (BEL) stands out as the top pick within the defence segment.
Defence Sector Developments Boost Outlook
The Indian Defence Acquisition Council (DAC) approved capital acquisition proposals totaling ₹79,000 crore during its winter session. This brings the fiscal year 2026 year-to-date approvals to roughly ₹3.3 trillion, nearly doubling last year's capital outlay. Nearly half of these approvals occurred in Q3FY26, with proposals worth ₹1.6 trillion announced in October and December 2025. These significant approvals provide visibility for future orders over the next two to four years, bridging the gap between approval and firm contract finalisation.
Additional key developments include successful user trials for the Akash-NG missile system, the delivery of the fifth F-404 engine to Hindustan Aeronautics Limited (HAL) by GE, and the release of guidelines for two major shipbuilding schemes valued at ₹44,700 crore. The emergency procurement window for the Armed Forces has also been extended until mid-January 2026, facilitating the swift acquisition of critical platforms.
Commodity Prices and Margin Resilience
Commodity prices have generally trended higher through FY26. While HRC steel prices, crucial for EPC companies, saw a moderation of about 6 per cent from March 2025 levels, zinc prices rose approximately 9 per cent, and copper and aluminum increased by 21 per cent and 8 per cent respectively. Despite potential headwinds from commodity inflation, margin outcomes for EPC players are expected to remain resilient. This resilience is attributed to hedging strategies, diverse revenue mixes, and indigenisation levels, particularly for defence companies. Margins across the coverage universe are projected to improve by roughly 50 basis points year-on-year.