Motilal Oswal Bets On ABB, L&T, BEL As Its Top Stock Picks In Capital Goods Sector Ahead Of Q3 Results

Motilal Oswal Report

Our top picks in the sector are ABB, Larsen and Toubro, and Bharat Electronics. We expect ABB to be a key beneficiary of an improved addressable market for short-cycle orders from the private sector, as well as transmission, railways, data center, and PLI-led spending.

We expect L&T to continue benefiting from international spending and a potential revival in domestic spending, while maintaining strong control over its working capital.

We favor BEL for its strong presence in defense electronics, ability to grow revenue and PAT in mid-teens CAGR, and improving return ratios.

The capital goods sector stocks have declined over the last six months on account of concerns around order inflow improvement, the sustainability of execution growth, as well as high margins.

With FY25 being an election year, order inflow was expected to be weak, but it is anticipated to ramp up from Q4 FY25 onwards. However, ordering has remained strong across thermal power, renewables, transmission and distribution, data centers, buildings, and factories, while it has been weak in water and railways.

Defense sector ordering is also expected to ramp up based on recent approvals. For genset players, as highlighted in our recent note, demand was initially impacted in October and November for low-to-mid kVA nodes but has started to recover.

Overall, we believe that despite selective order inflow improvement, the strong existing order books provide healthy revenue visibility for companies in the sector. We expect a 19% YoY growth in execution for Q3 FY25. We expect margins to remain largely stable QoQ, given the benign commodity prices.

As a result, we expect a ~20bp YoY expansion in Ebitda margin for our coverage universe. For Q3 FY25, we estimate our coverage companies to report revenue growth of 19% YoY, Ebitda growth of 21% YoY, and PAT growth of 26% YoY.

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