Capital goods firms are seeing a 10% drop in order inflows, excluding market leaders, as rising metal prices squeeze profit margins. While power and defence segments show growth, companies with fixed-price contracts face increased risks. Investors are now watching whether firms can pass these higher costs to customers in the coming months.
The capital goods sector shows a split performance for the second quarter of the 2027 fiscal year. While industry giant Larsen & Toubro reported robust order inflows of approximately ₹1 trillion, the broader market struggled. Excluding the company's performance, the rest of the sector saw a 10% year-on-year decline in new orders. This gap highlights a tough environment where smaller and mid-sized firms are facing more pressure to secure profitable business.
Commodity Inflation Impacts Margins
The most significant challenge for the industry this quarter is rising input costs. Prices for key industrial metals, including zinc, copper, aluminium, and pig iron, rose by double digits during the period. This has placed heavy pressure on profit margins. Companies that signed fixed-price contracts without clauses to pass on higher costs to customers are in a difficult spot. Investors are closely watching management comments to see if these companies have enough pricing power to offset these rising expenses in the second half of the fiscal year.
Resilience in Power and Defence
Despite the broader slowdown, two areas remain bright spots. The power transmission and distribution segment saw a 120% surge in order books, reaching ₹13,700 crore. This growth is being driven by the government's push for grid modernization and the Green Energy Corridor project. Similarly, the defence sector saw a 19% increase in order inflows compared to last year, after adjusting for the base effect of large previous orders. While these sectors show strength, they are not immune to problems. Bureaucratic delays continue to impact the execution of critical projects such as next-generation corvettes and submarine initiatives, which could slow down the timeline for revenue recognition.
Geopolitical Risks and Execution
International operations are also facing headwinds. Geopolitical tensions in the Middle East have created uncertainty, leading to execution delays for some companies. Firms such as Cummins and Larsen & Toubro have noted that this regional instability is affecting the speed of project completion. Looking forward, market participants are monitoring companies like ABB India, Siemens, and BEML to see how they manage these hurdles. The key monitorable for investors will be the ability of these firms to maintain margins amidst persistent inflation and ensure that their project pipelines turn into actual revenue without significant cost overruns or further delays.