Capital goods companies are positioned for stronger sequential earnings in the October-December quarter (Q3FY26), with growth expected from post-monsoon recovery, healthy order inflows, and improved execution across transmission and distribution (T&D) segments. The sector outlook indicates mid-teens revenue growth driven by robust order books and sustained industrial demand.

Order Inflow Expectations Show Mixed Trends

The order inflow landscape presents contrasting scenarios across major players. GE Vernova T&D India is anticipated to report strong order inflows, bolstered by a significant contract from Caldwell for South Olpad, which should substantially boost its order book position.

Hitachi Energy faces a challenging comparison with an expected 80-84% decline in order inflows, primarily attributed to the high base effect from a large high voltage direct current (HVDC) order received in the previous quarter.

Revenue Growth Projections Favor T&D Segment

The transmission and distribution sector emerges as the primary growth driver for Q3FY26, with both project and product companies expected to lead sectoral performance. T&D product companies are projected to outperform other segments with approximately 18% overall growth.

GE Vernova T&D is expected to report robust growth, while Siemens Energy and Hitachi Energy are projected to deliver around 17% growth each. The industrial machinery segment faces headwinds with moderate 7-8% revenue growth, impacted by sluggish export markets and potential dispatch delays amid tariff-related uncertainties.

Margin Outlook Presents Mixed Picture

EBITDA margin expectations vary significantly across companies, with some players benefiting from operational leverage while others face pricing pressures. GE Vernova stands out with estimated EBITDA margins of around 22%, representing a substantial 530-basis point year-on-year expansion supported by improved gross margins and operational leverage.

ABB India faces margin pressure with an estimated 390-basis point year-on-year decline in EBITDA margins, attributed to weaker pricing power and rupee depreciation impact against the US dollar during Q3FY26.

Key Sector Catalysts and Outlook

Several factors will influence the sector's performance trajectory, including execution improvement, private capex recovery, demand trends in power and T&D infrastructure, nuclear energy, and data centers. Geopolitical tensions continue to impact export-oriented businesses.

Amit Anwani, Research Analyst at PL Capital, emphasized that execution will be the key trigger for the sector's next re-rating phase. "The re-rating point will come when there is very strong execution coming in, which will also provide leverage on margins," he noted, highlighting execution as the critical success factor.

Current valuations appear moderately attractive compared to historical averages, with the outlook dependent on sustained capital expenditure spending across key end-user industries.

Source: https://www.cnbctv18.com/market/stocks/bhels-q3-earnings-disappoint-execution-remains-a-key-concern-amit-anvani-of-pl-capital-alpha-article-19823648.htm

Capital goods stocks experienced significant pressure for the third consecutive trading session on January 12, as market participants reacted to reports suggesting the government may allow Chinese companies to participate in bidding for government contracts across infrastructure, power, and manufacturing sectors.

Stock Performance and Market Impact

Major capital goods companies witnessed substantial declines during the trading session:

Hitachi Energy India was particularly affected, with the stock declining 14% over the three-day period. A partial recovery was observed later in the trading session following comments from US Ambassador to India Sergio Gor, which triggered broader market recovery.

Policy Background and Concerns

The market reaction stemmed from Reuters reports indicating the Centre is considering rolling back 2020 procurement restrictions that previously limited Chinese companies from bidding for government contracts. This potential policy shift follows easing diplomatic and border tensions with China. The proposed changes aim to revive competition, reduce project costs, and accelerate execution of public and private projects, particularly in infrastructure, power, and manufacturing sectors.

Brokerage Analysis: Limited Impact Expected

Despite market concerns, leading domestic brokerages have provided reassuring assessments regarding the potential impact on Indian capital goods companies.

Systematix Perspective

Systematix highlighted several factors that could limit the impact on domestic players:

• Localization Focus: The government's aggressive push for localization in power equipment over recent years
• Capacity Investments: Substantial capital expenditure announcements from power generation and transmission equipment players
• Strategic Considerations: The strategic importance of power grids to national security

The brokerage expects limited impact on transformer, switchgear, substation and grid automation businesses, including companies like GE Vernova T&D, Siemens Energy, Hitachi Energy, TARIL and CG Power.

Sector-Specific Impact Assessment

Strategic Infrastructure Considerations

Systematix emphasized the critical nature of power grid infrastructure, noting that power grids represent strategically important national assets and high-value targets. The increasing digitization and automation of grid systems, including sensitive areas like grid automation systems and SCADA/EMS platforms, reinforces the strategic importance of maintaining domestic control.

The brokerage noted that TBEA, the globally third-largest Chinese player, has a capacity of 200 GVA, representing less than 5% of India's transformer industry capacity.

PL Capital Assessment

PL Capital provided additional perspective on potential competitive dynamics, suggesting that while BHEL and L&T could face incremental competitive pressure in the BTG (Boiler, Turbine, and Generator) segment, Chinese participation is likely to remain limited due to strategic sensitivity and control risks associated with critical infrastructure projects.

The brokerage expects that even if Chinese players are permitted to participate, the government would likely mandate local manufacturing requirements. Recent CEA notifications to localize 16 critical components, including switchgear, insulators, and voltage transformers, are expected to support the domestic transmission and distribution cycle while reducing import dependence.

The current market reaction reflects investor concerns about increased competition, though brokerage analysis suggests the impact on established Indian capital goods manufacturers may be more limited than initial market fears indicate, particularly given ongoing localization initiatives and strategic infrastructure considerations.