Whalesbook
Market Surge Driven by Politics and Infrastructure
The BSE Capital Goods index has reached an all-time high, fueled by strong buying in power and cable companies and a significant political development in West Bengal. Analysts believe this political shift is expected to boost capital expenditure, aligning with national goals for industrialization and infrastructure development. This has pushed major companies like Bharat Heavy Electricals Limited (BHEL) and Polycab India to new peaks, indicating investor confidence in the sector's future.
A decisive BJP victory in the West Bengal Assembly elections is seen as a key factor driving increased industrialization and spending, according to Elara Capital. This regional push, along with national projects, supports the sector's expansion. The Union Budget 2026-27 further underscores this commitment, announcing a record $133.1 billion for infrastructure projects like roads, ports, and railways.
BHEL: Strong Orders Amid High Valuations
Bharat Heavy Electricals Limited (BHEL) has been a leading performer, hitting new highs. The company's large order book of ₹2.4 trillion as of May 2026 offers strong revenue visibility for the coming years. JM Financial forecasts steady order inflows of ₹60,000-70,000 crore annually for FY27 and FY28, reiterating a 'Buy' rating with a target of ₹435. ICICI Securities also rates BHEL a 'Buy' with a ₹460 fair value, expecting better margins and returns from improved execution starting FY27. BHEL's Q4 FY26 results showed a 155% profit surge and 37% revenue growth year-on-year, driven by better power segment execution. However, despite strong operations, BHEL's valuation is a concern. Its trailing twelve-month (TTM) P/E ratio is around 83-150x, far above the industry median for Specialty Industrial Machinery (29.95x). The high valuation and a modest 6.12% Return on Equity (ROE) lead to mixed views, with some downgrading due to high valuations, while GuruFocus labels it 'modestly overvalued'.
Polycab India: Growth Momentum and Valuation Picture
Polycab India is also seeing optimism, driven by expected growth in the Indian wires and cables industry, which is projected to expand 1.5-2x Real GDP. Growth comes from domestic demand for infrastructure projects, higher energy use, and new sectors like Data Centers and EVs. Power Transmission & Distribution (T&D) alone is set to attract over ₹9 trillion in investments over the next seven years. Polycab's strong operational results include Q4FY26 revenue and EBITDA growing 27% and 13% year-on-year, respectively, according to Motilal Oswal, which maintains a 'Buy' rating with a target of ₹9,800. The company's strategy includes gaining market share in cables and wires, expanding exports, and growing its Fast-Moving Electrical Goods (FMEG) segment. Though its P/E ratio (TTM) of 46.79-54.0 is above its 10-year median and industry average, analysts mostly rate it 'Buy' with an average 12-month price target around ₹8,565. GuruFocus views Polycab as 'modestly undervalued' based on its GF Value™, trading below its estimated fair value.
Company Comparisons
While BHEL's TTM P/E of 83.20x is well above the Indian Electrical industry average of 30.6x, it trades higher than peers like Apar Industries (P/E 51.88x). However, its PEG ratio of 0.42x suggests growth could justify the valuation against peers. Polycab's P/E of 48.2x is above its industry median of 29.95x but seen as good value compared to a peer average of 85.6x. Competitors in the wires and cables market include Havells, Finolex Cables, and KEI Industries.
Past Trends and Economic Factors
Indian capital goods sector rallies have often occurred after policy changes and better outlooks. Stable governments after elections typically boost investment. Government focus on infrastructure, as seen in the Union Budget 2026-27 allocating $133.1 billion, boosts demand for capital goods firms. The BSE Capital Goods index has already surged 17% in the past two months, showing strong momentum.
India's manufacturing sector is expected to grow steadily, with output forecast to rise 5% in 2026. However, rising input costs and logistics remain a concern for profits. The capital goods segment showed lower capacity use (69%) in Q4 FY26, suggesting room for increased output as demand grows. Government infrastructure spending and manufacturing policies are key economic drivers.
Analyst Views
Analyst ratings for BHEL are mixed, with some like Morgan Stanley maintaining an 'Overweight' and others like Kotak Securities rating it 'Sell'. Polycab sentiment is mostly positive, with most analysts rating it 'Buy' and setting targets above ₹8,500. JM Financial and ICICI Securities have reaffirmed 'Buy' ratings for BHEL with updated targets.
Key Risks and Concerns
BHEL's main concern is its high valuation. Questions remain about whether margin gains can last, as some are tied to non-operational factors. Managing its ₹2.4 trillion order book presents execution risks; past performance shows execution difficulties, leading to delays and cost overruns. Its profitability has historically been low with thin margins. Shortages of industrial gases and helium due to global conflicts pose a near-term risk to production and revenue.
Polycab has strong growth prospects, but its valuation is also high, trading 18% above its 10-year median P/E. The company faces stiff competition and relies on government spending, making it vulnerable to policy shifts. Input cost changes remain a persistent factor. Investors watch its ability to keep market share against rivals like Havells and KEI Industries.
The capital goods sector faces broader economic challenges like rising costs and supply chain issues. Government infrastructure investment is high, but actual project speed and how well companies like BHEL manage large backlogs are key to sustained success. Capital goods capacity use (69% in Q4 FY26) shows room for growth but also potential underused assets.
Looking Ahead
Analysts forecast steady BHEL order inflows of ₹60,000–70,000 crore annually for FY27-FY28, with improved EBITDA margins expected by FY28. Diversification into defence, railways, and green hydrogen offers new growth paths. Polycab's outlook is bullish, with industry growth and ongoing market share gains expected to drive performance. Analyst price targets suggest upside for both, though optimism varies. While political and infrastructure support is strong, investors must balance this against current valuations and execution risks in these capital-intensive sectors.