Capital goods sector may take a margin, order flow hit in the near term

Supply-chain disruptions, commodity inflation and project delays are likely to pressure margins and order flows, even as long-term demand drivers remain intact

The capital goods sector delivered a good performance in the fourth quarter of 2025-26 (Q4FY26), despite the challenges caused by the ongoing war between US-Israel and Iran. These challenges intensified in Q1FY27 with supply-chain disruptions, rising commodity and input costs, and project disruptions in West Asia. 

 

However, domestic demand continued to be strong. Many capital goods players have done well with order inflows and execution. There are visible near-term margin pressures, but private sector capex is picking up and the long-term scenario is promising with multi-year demand in many segments.

 

Companies such as BHEL, Siemens, Cummins and ABB India saw strong order inflows indicating private capex momentum. Demand is broad across infrastructure, residential real estate, quick commerce, mining, food & beverages, pharmaceuticals and data centres. 

 

Engineering, procurement and construction (EPC) players were the most impacted by the war, with estimated revenue loss of ₹5,000 crore for L&T, ₹400 crore for KEC International and ₹190 crore for Kalpataru due to project delays. Earnings before interest, taxes, depreciation and amortisation (Ebitda) growth was modest and margin compression is visible. Most companies were unable to pass through commodity inflation and currency-related pressures in Q4. 

 

The transmission and distribution (T&D) sector saw momentum, due to renewable energy integration driving investment in transmission lines, transformation capacity, and grid stability solutions. Despite geopolitical turmoil, firms are focused on growing exports. 

 

Data centres remain a big growth theme, driving demand in categories like power generation turbines (Triveni Turbine), specialty cables (Apar Industries), transformers and switchgear (CG Power, Hitachi Energy, Siemens Energy and GE Vernova T&D India), chillers and cooling towers (Thermax) and skids for data centre infrastructure (Praj Industries).

 

Distribution & electrification players like Siemens, ABB and Schneider can capture 10-20 per cent of data centre capex, while the backup segment is dominated by Cummins. 

 

The government achieved 98 per cent of its revised FY26 capex target, spending ₹10.8 trillion against the revised estimate of ₹11 trillion. The FY27 target is ₹12.3 trillion. Players fulfilling government contracts are better protected through price variation clauses; private contracts are mostly fixed-price.

 

Valuations are elevated at around 20-25 per cent above the 10-year average for many stocks. Analysts are consensus bullish though they are being more selective and earnings downgrades have been issued in many cases. 

 

Larsen & Toubro is typically recommended as a proxy for the entire sector. Triveni Turbine, Siemens Energy India, Apar Industries, Siemens, Bhel and Thermax are other consensus picks but a common theme is margin pressures. 

 

The T&D cycle has multi-year momentum, with rising power consumption, increasing peak load in summer, renewable transition, and grid modernisation. The annual bidding pipeline is an estimated ₹1 trillion across intra-state transmission projects with 1-2 large high voltage direct current (HVDC) tenders to be finalised annually.

 

Among majors, L&T missed its 15 per cent revenue growth target for FY26, due to the West Asia conflict, and delays in water-related projects. For FY27, L&T guides for 10-12 per cent order inflow and revenue growth, with a softer first half. Core Ebitda margins will remain stable at 7.8 per cent. L&T’s Lakshya 2031 targets doubling revenue over five years at Ebit margins of 16-17 per cent and order inflows annual growth of 10-12 per cent.

 

Praj Industries says greenfield fuel ethanol ordering may see more demand as higher blending mandates are implemented. Data centres present an opportunity of ₹50-100 crore per project. Praj says it has delayed finalisation of ₹300 crore worth of enquiries because better visibility on raw material costs is required. 

 

Thermax is focussed on margin protection. Boiler manufacturing capacity is operating at high utilisation levels, with FY27 capex of ₹250 crore for de-bottlenecking and cooling-related expansions. Data centres present an opportunity for cooling and boilers.

 

Triveni Turbines says the enquiry pipeline has more than doubled over the past year. Overall pipeline stands at 18 gigawatts (Gw), of which 7 Gw is from India and 3 Gw from the US. US enquiries are up by multiples due to geothermal, biomass and combined cycle gas turbine (CCGT) opportunities. Africa presents a refurbishment market. 

 

Voltamp Transformers had new orders worth ₹310 crore in April, exceeding the Q4FY26 order inflow and pushing the order book to ₹1,500 crore.  

 

The ongoing US-Iran war remains the major concern. Fuel shortages, commodity inflation, supply chain disruptions and a weakening currency will impact margins in the near-term. Structural demand could persist for years but near-term ordering may be deferred, unless there is a conflict resolution. 

 

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The writer is a New Delhi-based independent journalist.