The Capital Goods sector saw mixed set of earnings in the first quarter of FY27, with strong revenue growth and robust backlog accretion, while margin pressure persisted with mixed order intake.
According to global brokerage firm Macquarie, the overall performance across its coverage universe in the sector remain mixed, but better than expectation, with Revenue, EBITDA and PAT growth of 13%, 15% and 26%, year-on-year (YoY).
BHEL, Hitachi Energy, and Siemens Energy, delivered strong earnings growth in the June quarter, which more than offset weak performances from a few industrial names.
Margin performance remained mixed with most companies seeing declines. The total Industrials EBITDA margin improved 20 bps YoY to 10.8% and gross margin rose 40 bps, aided by BHEL's turnaround and robust profitability in power transmission and energy equipment companies, Macquarie noted.
The June quarter also saw sustained strength in order backlog despite a mixed trend in fresh order inflows. Overall new orders grew 12% YoY to Rs 1.66 lakh crore, but declined 22% YoY excluding L&T and BHEL, impacted by a high base and lower awards for a few companies.
“Despite this decline, the sector's overall order backlog grew 27% YoY and 26% excluding L&T and BHEL, providing healthy visibility,” said Macquarie.
Outlook Ahead
Macquarie expects steady growth in revenue and earnings with healthy order inflows amid strong order pipeline. Sustained government spending, albeit at a slower pace, continues as it sees acceleration in private-sector capex.
It noted that the infrastructure build-out led by railways, power, and defence continue to be driven by government, while it sees private sector spending across metals, automobile, power equipment, renewable energy, transmission, defense, aerospace, electronics & industrial machinery, data centres, and now private space tech. Capacity expansion is emerging in hospitals and hospitality as well.
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Key Risks
According to the brokerage firm, geopolitical risks and higher commodities prices could impact profitability of the capital goods companies, especially in projects or orders that are at fixed prices.
“This could be a key risk, as a significant percentage of orders in the Gulf region for L&T are on fixed price basis,” Macquarie noted.
Stock Picks
Macquarie's top stock picks in the Capital Goods sector include CG Power and Industrial Solutions, Bharat Electronics, Cummins India, and Larsen & Toubro (L&T).
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