Motilal Oswal sector of the week: Capital goods; check top stock bets here

Motilal Oswal said that stable execution and rising export momentum could shape capital goods sectors' H2FY26 outlook

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India’s industrials, defence and railways ecosystem exited the second quarter of FY26 on a broadly steady foot, with sectoral indicators signalling resilient execution, stable margins and a strengthening export pipeline. While base ordering from private capex remained subdued, activity held firm in transmission, renewables and defence, helping maintain revenue visibility across EPC and manufacturing clusters.

 

Execution performance during the quarter was largely in line with expectations, supported by mid-teen year-on-year revenue growth. Profitability remained healthy, aided by stable operating margins across most sub-segments. EPC companies saw a marginal softening in margins owing to a weaker revenue mix, while product manufacturers recorded a slight dip as commodity prices began to inch higher. Defence players experienced temporary contraction due to uneven execution schedules, though full-year margins are expected to recover as delivery cycles normalise and indigenisation strengthens.

 

Order inflows mirrored the first quarter trend, with momentum steady in power transmission and renewables while private capex orders remained muted. Engineering, Procurement, and Construction (EPC) players continued to benefit from strong tendering activity, even as timing-related delays persisted in some award processes. Product-oriented businesses saw softer international demand due to geopolitical frictions, though domestic requirements stayed firm. The power generation market displayed signs of stabilisation, supported by healthy volume traction. Defence procurement activity remained robust, and larger platform orders are expected to progress toward finalisation in the second half of FY26.

 

Exports emerged as a key tailwind, driven by strengthening demand from the US, Europe and the Middle East. Higher tendering activity across utilities, transmission and distribution (T&D), data centers and defence systems boosted visibility, while the acceptance of Indian equipment in developed markets continues to expand. Companies in EPC, power generation equipment and defence systems collectively highlighted a widening opportunity pipeline, particularly as infrastructure and energy transition projects gain momentum globally.

 

Looking ahead, sector performance in H2FY26 will hinge on two critical monitorables: the pace of government-driven capex, especially in transmission and defence, and signs of a broader revival in private-sector ordering. With strong order books across EPC and defence and improving export traction, the medium-term outlook remains constructive. The sector’s structural growth thesis is anchored by domestic infrastructure expansion, accelerated indigenisation, and rising global competitiveness. Capital goods sector continues to offer a steady opportunity landscape despite near-term variability in private capex flows.

Cummins India – Target: ₹4,950

Cummins is witnessing a broad-based revival in its powergen segment, with demand from manufacturing, real estate, healthcare, hospitality, and data centers driving volumes back to pre-emission levels. Strong positioning in high-kVA nodes and a robust product-distribution network underpin market share gains. Industrial growth is expected to gain from new products in railways, mining, & construction, supporting an 18 per cent compound annual growth rate (CAGR) over FY25–28. Distribution remains a steady driver, aided by telematics, aftermarket penetration and pricing, with a projected 19 per cent CAGR. Exports continue to benefit from global demand, particularly in data centers and the low-horsepower segment across multiple regions. With BESS adding long-term optionality, we model revenue/Ebitda/PAT CAGR of 16 per cent/16 per cent/17 per cent over FY25-28.

BEL – Target: ₹500

The Indian Army’s ₹3,000 crore tender for the Defence Research and Development Organisation (DRDO)-developed Quick Reaction Surface-to-Air Missile (QRSAM) ‘Anant Shastra’ project, with Bharat Electronics (BEL) as lead integrator, boosts its order book beyond ₹1 trillion and underscores its leadership in strategic defence programs. Positioned strongly under the Technology Perspective and Capability Roadmap (TPCR) 2025 roadmap, BEL is set to benefit from sustained opportunities across the Army, Navy, and Air Force, spanning radars, EW systems, communication networks, and drone-defence solutions. Additional growth levers include orders for next-gen corvettes, Tejas Mk1A electronics, loitering munitions, and exports. With sales/Ebitda/PAT CAGR of 18 per cent/17 per cent/17 per cent expected over FY25–28, BEL offers robust long-term growth visibility, making it a compelling investment in India’s defence modernisation journey.

 

Disclaimer: This article is by Motilal Oswal Financial Services Research Desk. Views expressed are their own.