Capital goods, defence outlook strong in Q3; BEL top pick: Motilal Oswal

Selective growth pockets in India’s capital goods and defence sectors are expected to sustain healthy execution momentum in Q3FY26, driven by strong order inflows and robust order books, according to a note by Motilal Oswal.

 

While overall ordering activity remains strong across thermal power, renewables, transmission & distribution (T&D), data centers, buildings & factories, and defence, domestic private sector demand is picking up only selectively. Government capital expenditure growth has remained healthy in the first eight months of FY26, led by defence spending, and is anticipated to accelerate from the railways in the coming quarters. Analysts note that the government’s capex growth also benefited from a low base last year.

 

 

The brokerage highlights a robust export outlook for companies in renewables and T&D, with select EPC and product companies benefiting from international demand. However, commodity price movements warrant close monitoring, as metals such as copper and zinc have risen in recent months.

 

Motilal Oswal estimates revenue growth of around 16 per cent year-on-year (Y-o-Y) for its coverage universe in Q3FY26, with EBITDA expected to grow 20 per cent Y-o-Y and PAT by 24 per cent Y-o-Y. The brokerage maintains a positive stance on large-cap companies Cummins India (KKC) and Siemens Energy, as well as long-term industrial leader L&T. Among mid- and small-cap companies, Kirloskar Oil Engines (KOEL) and Kalpataru Projects International (KPIL) are preferred, while Bharat Electronics (BEL) remains the top pick in the defence segment.

 

Stable ordering momentum across segments

 

During Q3FY26, ordering activity remained stable across defence, power T&D, hydrocarbon, heavy civil, and buildings & factories. The quarter saw select large-sized orders, including L&T winning an ultra-mega project in hydrocarbons, Thermax securing a boiler order, and GVTD receiving an HVDC project. Domestic private sector ordering is gradually picking up in metals & mining, buildings & factories, and thermal power, with further growth expected in the coming quarters.

 

defence segment orders continued to be robust. During the quarter, BHE booked orders worth approximately ₹5,500 crore, BDL announced ₹4,600 crore, KECI secured ₹7,600 crore, and KPIL acquired ₹5,100 crore in new orders. Strong backlogs and pending pipeline finalisations are expected to support ~16 per cent Y-o-Y execution growth for the coverage universe in Q3FY26.  CATCH STOCK MARKET LIVE UPDATES TODAY

 

Defence sector developments

 

India’s Defence Acquisition Council (DAC) approved capital acquisition proposals totaling ₹79,000 crore in its winter session, taking FY26 year-to-date approvals to roughly ₹3.3 trillion, nearly double the last year’s capital outlay of ₹1.8 trillion. Nearly half of these approvals came in Q3FY26, with proposals worth ₹1.6 trillion announced in October and December 2025 combined. These approvals provide visibility for orders over the next two to four years, given the time required to convert approvals into firm contracts.

 

Other key developments include the completion of user trials for the Akash-NG missile system, the fifth F-404 engine delivered to HAL by GE, and the rollout of guidelines for two major shipbuilding schemes totaling ₹44,700 crore. Additionally, the DAC extended the emergency procurement window for the Armed Forces until mid-January 2026, allowing continued fast-track acquisition of critical platforms and equipment.

 

Rising commodity prices

 

Commodity prices have generally trended higher in FY26, though HRC steel prices, crucial for EPC companies, moderated by around 6 per cent from March 2025 levels. Zinc prices rose roughly 9 per cent, and copper and aluminum saw increases of 21 per cent and 8 per cent, respectively. While commodity inflation remains a headwind, margin outcomes for EPC players are expected to be resilient, aided by hedging strategies, revenue mix, and indigenisation levels for defence companies. Overall, margins across the coverage universe are projected to improve by about 50 basis points Y-o-Y, with EPC companies gaining ~60bp and product companies ~40bp.

 

Export demand outlook

 

Export demand is expected to remain selective. L&T remains confident in the long-term growth potential from international geographies, and other EPC companies are witnessing healthy overseas order inflows. Transformer and renewable equipment players anticipate positive export demand, though product companies like ABB, Siemens, Thermax, and Triveni Turbine are yet to see a meaningful export revival. Selective export growth is also planned by Cummins and KOEL. defence exports remain strong in outlook, although ordering momentum is yet to materialise.

 

Selective sector stance continues

 

Motilal Oswal retains a selective stance in the sector, favoring companies in T&D, renewables, and defence. “Companies growing at a high pace will remain preferred bets over the medium to long term,” the brokerage states.

 

The brokerage’s top picks continue to be L&T, KKC, and Siemens Energy in the large-cap industrial space; KOEL and KPIL in mid- and small-cap segments; while BEL remains its preferred defence company.   

Disclaimer: The views or investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.