2 February 2025
Sector: Capital Goods
Capital Goods
Revised
Companies
L&T
ABB India
Siemens
Hitachi Energy
BEL
Thermax
Cummins India
KEC
KOEL
KPIL
Triveni Turbine
Zen Tech
TP
4,100
7,200
6,300
10,500
360
3,500
4,100
910
1,340
1,360
780
2,400
Rating
BUY
BUY
NEUTRAL
SELL
BUY
SELL
BUY
NEUTRAL
BUY
BUY
BUY
BUY
Time to be selective
Shifting priorities
With a weaker capex growth of 7.3% for FY25RE and 10% growth for FY26BE, we
believe the industrial sector will face challenges in growing inflows at the same pace as
it did until now when capex growth was 30% during FY21-24. This 10% capex growth for
FY26BE is also largely driven by higher allocations to other areas, such as innovation
schemes, while allocations for roads and railways have remained flat for FY26BE. We,
thus, believe that it would be prudent to be selective now for the capital goods sector,
focusing on companies that are relatively less impacted by slower growth in
government capex or have created alternate growth areas that can, to some extent,
offset the impact of slow government spending. We align our valuation multiples to
bake in lower valuations due to lower government capex and lower-than-expected
private capex so far. We downgrade Hitachi Energy and Thermax to SELL, and Siemens
to NEUTRAL. We continue to remain positive on areas such as power T&D, defense,
data centers, and electronics, and would prefer L&T, ABB, and Cummins in the large-cap
industrial space and Bharat Electronics in the defense space.
Sector view: Selective stance now
Though we believe that the underlying thesis on capex, particularly in power
T&D, renewables, defense, and high-growth areas such as data centers,
electronics, semiconductors, PLI-led capex, and battery storage
—
continues to
stay but with lower-than-expected overall capex growth of 10% YoY for FY26,
we do perceive risks to our assumptions on order inflows for the industrial
sector. Additionally, with private capex across base industries yet to show
signs of meaningful improvement, near-term support for lower-than-
expected government capex allocation is not visible.
Among our coverage universe, companies with high exposure to railways,
water, road construction, and private capex are likely to be more impacted
by lower order inflows over the next 1-2 years. In contrast, companies
focused more on power T&D, renewables, defense, and high-growth areas
will be relatively better placed.
Given this scenario, we would now be selective in our view on the capital
goods sector, with a more positive bias towards players with a diversified mix
towards higher-growth areas as well as those involved in defense
indigenization. We align our
valuation
multiples to bake in lower valuations
due to lower government capex and lower-than-expected capex so far in the
private sector. We would prefer L&T, ABB, and Cummins in the large-cap
industrial space and BEL in the defense space.
Major announcements in the budget for the sector
In the Union Budget 2025-26, the government has maintained its total capex
outlay at INR11.2t, largely the same as in FY25BE. However, FY25 capex has been
revised downward to INR10.2t. The allocation under key heads such as Railways
(INR2.5t) and Roads (INR2.7t) remained flat vs. the revised estimate for FY25,
while the capital allocation for Defense saw a notable hike of 13% to INR1.8t. Key
announcements included asset monetization over 2025-30 to raise funds worth
INR10t, the continuation of interest-free loans to states for capital investments,
incentives for shipbuilding, nuclear energy, and power sector reforms.
Research analyst –
Teena Virmani
(Teena.Virmani@MotilalOswal.com)
Harsh Tewaney
(Harsh.Tewaney@MotilalOswal.com) |
Prerit Jain
(Prerit.Jain@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.