The capital goods sector gets a power-up, its weight rises in Nifty

Capital Goods Sector Shows Impressive Growth in Q4FY25

The capital goods sector roared to life in the March quarter (Q4FY25), delivering impressive results across the board. Leading players like Larsen & Toubro, Hitachi Energy, ABB India Ltd, and Siemens India Ltd all reported robust order inflows.

This surge was driven by a combination of factors: strong international orders in the renewable energy sector and a significant boost from domestic transmission and distribution (T&D) segments.

• Impressive Order Inflow Growth: Nuvama Research data reveals a remarkable 21.2% year-on-year increase in order inflows for the capital goods companies under its coverage, reaching ₹1.64 trillion. Revenue also saw a healthy 10.4% year-on-year growth, hitting ₹1.35 trillion, primarily fueled by strong execution in the power electrical equipment sector.
• Positive Outlook: Management commentaries paint a picture of continued robust order inflows, providing excellent revenue visibility for the sector. The prospect pipeline also remains strong.
• Larsen & Toubro: Boasts a 57% year-on-year increase in its prospect pipeline, particularly from international sources.
• Hitachi Energy: Maintains a strong prospect pipeline driven by upcoming HVDC projects and export orders.
• KEC International Ltd and Kalpataru Projects International Ltd: Poised to benefit from a robust T&D pipeline.
• Increased Market Weight: Reflecting this strong performance, the weight of capital goods stocks in the Nifty 50 benchmark index climbed to 5.1% in May, up from 4.6% in April (Motilal Oswal Financial Services Ltd analysis).

Green Shoots and Cautious Optimism

The positive momentum is expected to continue, driven by strong ordering activity in key sectors such as T&D, renewable energy, and defense. Government capital expenditure (capex) is also anticipated to gain momentum. A report by ICICI Securities Ltd (June 2nd) highlights ₹7.5 trillion in government capex over the six months ending April 2025 – the highest ever, promising good prospects for capex-oriented stocks.

However, challenges remain: Private sector capex remains weak, with companies reporting delayed inquiries. Furthermore, valuations of key capital goods stocks are considered expensive.

Key Factors to Watch

Motilal Oswal has identified four crucial factors to monitor:

• Defense Sector: Finalization of emergency procurement pipelines and large project contracts.
• Diversification: Growth beyond electrification/energy segments for companies like ABB and Siemens.
• Private Sector Conversion: Conversion of inquiries into orders for private sector players such as Thermax and Triveni Turbine.
• Powergen Market Stability: Stability in the power generation market for companies like Cummins India and Kirloskar Oil Engines Ltd, which faced challenges due to a high base last year.