L&T To BHEL: Capital Goods Firms To Continue Double-Digit Growth Led By Defence Recovery

The growth of Indian capital goods companies will moderate going ahead, but double-digit growth led by Larsen and Toubro Ltd. and Bharat Heavy Electricals Ltd. should continue, according to Jefferies.

Defence order flows declined 79% year-on-year in the third quarter on high base, the brokerage said, adding the final quarter "should be good". Power and defence companies have the highest visibility ahead, it said in a note dated Feb. 19. "We believe that while growth will moderate, double-digit growth should continue."

Siemens Ltd. saw 16% year-on-year order flow growth, while Thermax Ltd. and ABB India Ltd. saw order flow decline 8% and 14%, respectively.

ABB sees high growth in data centres, renewables, and electronics, Jefferies noted, while Thermax expects strong fourth-quarter orders. L&T's orders rose 53%, and Bharat Electronics is targeting Rs 25,000 crore fiscal 2025 orders despite an 81% drop, the brokerage said.

Investor confidence has been low on L&T maintaining margins after the disappointment of the past two years, but flat nine-month margins are helping ease some of these concerns, it said.

Larsen & Toubro's consolidated net profit rose 14% in the third quarter, while ABB India's consolidated net profit rose 21%. Bharat Electronics Ltd.'s third-quarter profit rose 53% to Rs 1,311 crore.

Defence order flow has been weak, though recovery should drive upside, Jefferies said in the note. However, in line with lower sectoral multiples, given capex moderation, Jefferies lowered the target price to earnings for defence companies — Bharat Electronics Ltd., Hindustan Aeronautics Ltd., and Data Patterns India Ltd. — by a notch.

• Siemens Ltd.: Expected to benefit from revenue and margin recovery in Power T&D as spending visibility improves.

• Hindustan Aeronautics: Strong order pipeline and execution to drive growth.

• Larsen & Toubro Ltd.: Likely to meet or exceed order flow and revenue guidance.

• Thermax Ltd.: Operating leverage to drive upside.