Healthy order books may lift bottom lines in capital goods sector in Q3

Benign raw material costs, execution of healthy order book to aid growth, say analysts

For India’s capital goods and engineering firms, analysts expect a steady profitability streak for the December 2024-ended quarter (Q3FY25) even as a slump in stock market valuation is seen over order book growth concerns.

 

The Bloomberg analysts’ consensus shows a double-digit growth likely for all three metrics — net sales, earnings before interest, taxation, depreciation and ammortisation (Ebitda) and profit after tax (PAT), for most companies in this segment (see chart).

 

Analysts with brokerage firm Motilal Oswal, in a December note, said, “We expect a 20 basis points (bps) year-on-year (Y-o-Y) expansion in Ebitda margin for our coverage universe. For Q3FY25, we estimate our coverage companies to report revenue growth of 19 per cent Y-o-Y, Ebitda growth of 21 per cent, and PAT growth of 26 per cent.”

 

Motilal Oswal noted that this growth expectation “Is despite selective order inflow improvement. Strong existing order books provide healthy revenue visibility for companies in the sector.” 

 

For India’s largest engineering firm, Larsen and Toubro (L&T), the analysts expect a 20 per cent growth in consolidated revenue, and an 8.1 per cent core business Ebitda margin, up 40 bps from a year ago.

 

New order wins for companies in the capital goods and engineering space has been a mixed bag so far in FY25.

 

Analysts at Jefferies said, “Order flow growth tapered off post elections and investor concerns on growth/ valuations emerged.”

 

They added, “Actual (capital expenditure or capex) spend has been disappointing with the Centre’s capex declining 15 per cent in M7FY25. About 32 per cent Y-o-Y growth will be needed in November 2024-March 2025 for 5 per cent growth to be achieved in FY25E.” 

 

It noted some improved visibility on government infra spend post Maharashtra elections.

 

Existing strong order book, however, is expected to aid profit numbers for Q3FY25, as analysts with Nirmal Bang, in a December 26 note, said, “We expect most companies under our coverage to deliver good growth on the back of execution of a robust order book. We expect top line growth of 19.8 per cent Y-o-Y for our coverage universe. We see a 51 bps Ebitda margin improvement. This is on the back of easing raw material costs and operating leverage benefits.”