Q2 result preview: Orders, input costs to keep capital goods on rails

Brokerages predict 12-22% revenue growth and a 13-18% rise in Ebitda

Brokerage firms estimate that the capital goods sector will report double-digit growth in revenue and earnings for the July–September quarter (Q2) of 2024-25 (FY25). They noted that raw material prices have continued to ease over the past three months, while new order wins have increased.

Three brokerages — Motilal Oswal, Kotak, and Elara Capital — estimate revenue growth from 12 per cent to 22 per cent for Q2FY25. They expect earnings before interest, tax, depreciation, and amortisation to rise by 13–18 per cent year-on-year (Y-o-Y) for their respective capital goods coverage.

Elara Capital highlights strong industrial demand and robust execution, supported by a healthy order backlog, as the main drivers of an expected 14 per cent Y-o-Y growth in sales.

Elara analysts noted that major capital goods companies, excluding Larsen & Toubro (L&T), announced cumulative orders worth Rs 79,300 crore in Q2FY25, up 182 per cent from a year ago. L&T, according to BSE disclosures, announced orders worth up to Rs 47,500 crore during the same period.

In a Bloomberg poll, six analysts estimated L&T’s revenue at Rs 56,652 crore, while three analysts projected a net adjusted profit of Rs 2,558 crore for India’s largest engineering conglomerate.

While healthy order book execution is expected to drive revenue growth in Q2FY25, analysts believe margins will remain stable due to benign raw material prices.

Regarding margins, Motilal Oswal analysts expect them to remain within a stable range, citing benign commodity prices, cost-saving measures, and an improved product mix. Copper prices have eased by 2 per cent, aluminium by 4 per cent, and zinc has remained flat in recent months compared to the start of the first quarter of FY25. “Accordingly, we expect a 30-basis-point Y-o-Y margin expansion in Q2FY25 for our coverage universe,” they said.

However, gains from the recent easing of input costs may vary across different sub-segments of the capital goods sector. In a response to Business Standard last month, Ashish Modani, senior vice-president and co-group head of corporate ratings at ICRA, explained, “Long-term construction projects (over 18–24 months) generally have a commodity index-linked price variation clause, where both increases and decreases in commodity prices are passed on to the customer or project-awarding authority.”

He added, “Construction entities working in segments like industrial projects or warehouse construction typically have fixed-price contracts due to their shorter duration. These engineering, procurement, and construction entities may benefit from the moderation in commodity prices in the near term.”

Kotak analysts, however, offer a different view, stating, “Meaningful benefits from declining steel prices are expected to impact the second half of FY25.” They also noted the possibility of a sequential contraction in margins “to reflect the normalisation of benefits from lower raw material prices across the motor spectrum”, including companies like Siemens, ABB, and CG Power.