Capital Goods Firms Eye Stronger Q3 Earnings on Execution Boost

Sector Outlook

Capital goods companies are positioned for a stronger sequential earnings performance in the October-December quarter (Q3 FY26). This uplift is attributed to post-monsoon recovery, sustained healthy order inflows, and improved execution, particularly in the high-voltage power transmission and distribution (T&D) segments. The broader industrial space, however, is expected to present a mixed earnings picture.

Company Performance

GE Vernova T&D India is anticipated to report substantial order inflows, bolstered by a significant order for South Olpad. In contrast, Hitachi Energy's order inflows might see a sharp decline, primarily due to a very high base from the preceding quarter owing to a large high-voltage direct current (HVDC) order. ABB India is projected to achieve steady order inflow growth of approximately 26%, followed by KEC International and Siemens.

For the quarter, the key driver for the capital goods sector will be robust execution momentum across the T&D sector, with both project and product companies expected to lead growth. Supported by strong outstanding order books and healthy industrial demand, the sector is forecast to deliver mid-teens revenue growth. Within T&D product companies, growth is expected to outpace other segments, with an overall growth around 18%. GE Vernova T&D is expected to report strong growth, while Siemens Energy and Hitachi Energy are projected to deliver around 17% growth.

Revenue growth in the industrial machinery segment is expected to remain moderate at 7-8%, influenced by sluggish export markets and potential dispatch delays amid tariff uncertainties. Project companies, conversely, are likely to experience stronger revenue growth, averaging around 17%, driven by healthy execution, substantial order books, and robust traction in international markets.

Margin Dynamics

On the profitability front, T&D companies' earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are anticipated to improve year-on-year. GE Vernova's EBITDA margins are estimated at approximately 22%, indicating a significant 530-basis point expansion YoY, supported by healthier gross margins and operating leverage. Industrial machinery firms are also expected to witness margin improvements stemming from operating leverage.

However, ABB is forecast to experience a notable margin decline, with an estimated 390-basis point year-on-year drop in EBITDA margins. This is attributed to weaker pricing power and the impact of rupee depreciation against the U.S. dollar during Q3 FY26. Siemens, according to analyst polls, is expected to see around a 40-basis point margin expansion, as operating leverage helps offset some gross margin pressures.

Cummins and Thermax are projected to maintain stable margins with slight year-on-year improvements. Project companies are likely to report EBITDA margin expansion, driven by enhanced operating leverage and a favourable business mix.

Key Factors to Watch

Critical factors for this sector include sustained execution improvements, a pickup in private capital expenditure, evolving demand trends in power, T&D, nuclear, and data centres, and the impact of geopolitical tensions on export businesses. Current valuations appear somewhat muted relative to historical averages, and the sector's future outlook will hinge on the sustainability of capital expenditure spending. BHEL shares will remain under scrutiny following its Q3 results.

Amit Anwani, Research Analyst at PL Capital, commented that execution will be the primary catalyst for the sector's next phase of re-rating, stating, "For me, the focus definitely is execution. The re-rating point will come when there is very strong execution coming in, which will also provide leverage on margins."