Result preview: Capital goods sector may see modest profit growth in Q4

It would be supported by a rebound in defence and transmission orders

India’s capital goods sector is expected to post modest profit growth during the fourth quarter of 2024-25 (FY25), supported by a rebound in order inflows from the defence and transmission segments. This comes even as a broader revival in public and private sector ordering remains elusive.

 

Analysts tracking the sector expect improved execution and a healthy backlog to drive revenue growth.

 

Bloomberg analysts’ poll shows a likely double-digit rate of growth in net sales, earnings before interest, tax, depreciation and amortisation (Ebitda) and profit after tax (PAT) for most companies in this segment.

 

Analysts with brokerage firm Motilal Oswal said in a report: “For our coverage universe, we expect revenue growth of 16 per cent year-on-year (Y-o-Y) and profit after tax (PAT) growth of 6 per cent. We believe a valuation re-rating for the sector is still some time away and will be driven only after a meaningful outperformance of capex, order inflows, and margins.”

 

According to Elara Capital, capital goods companies, excluding Larsen & Toubro, saw a surge of 89 per cent Y-o-Y in order inflows during the quarter, amounting to ₹1.4 trillion.

 

This was led by an over threefold jump in defence-related orders, including a ₹62,700 crore contract awarded to Hindustan Aeronautics for the supply of 156 light combat helicopters.

 

Elara added that the uptick was broadbased across power, transmission, water, and engineering, procurement, and construction (EPC) as well.

 

“We expect sales growth of 6 per cent our capital goods coverage universe in Q4FY25 based on healthy industrial demand and execution backed by robust backlog,” the brokerage said in its April note. 

 

For India’s largest engineering firm, Larsen and Toubro (L&T), analysts expect consolidated revenue growth of 19 per cent, and a 9 per cent core business Ebitda margin — down 50 basis points (bps) from a year ago — as more projects reach the margin recognition threshold and as legacy orders near completion.

 

While the defence and transmission sectors saw strong traction, a broadbased pickup across the central and private sectors was still missing, according to Motilal Oswal.

 

“With fairly decent order inflows for transmission companies as well as L&T, the focus should now be on the timely execution of the current order book,” the brokerage said.

 

ABB and Siemens are likely to post double-digit revenue growth on the back of robust backlogs, according to Elara Capital, which added that Thermax and Cummins were also expected to deliver healthy topline numbers.

 

Copper, aluminium and hot-rolled coil prices rose 9 per cent, 5 per cent and 6 per cent, respectively, during the March quarter on a sequential basis.

 

With nearly 45 per cent of EPC backlogs under fixed-price contracts, any sustained increase in commodity costs could weigh on future margins, said analysts at Motilal Oswal.

 

Export demand, particularly in defence, could also provide some upside in the quarters ahead.

 

“Defence companies are optimistic about benefiting from increased export opportunities to Europe as the nation looks for rearmament after the Russia-Ukraine war,” said Motilal Oswal.

 

It added that engineering exports from India had begun to show signs of revival, a trend expected to benefit global-facing product firms.

 

“We envisage that a continued focus on key infrastructure capex areas (power, renewable energy, railways and defence) should reflect in this quarter’s order inflows. Last few quarters have clocked all-time high margins across product companies (ex-EPCs), which we believe can not only sustain, but may even improve over time,” said analysts at Nuvama Institutional Equities in its April note.