BEL, L&T, Kalpataru, Siemnes: Motilal Oswal's top picks from capital goods & defence space

Motilal Oswal Financial Services' analysis highlights steady base ordering activity across industrials, defence, and railways, presenting a promising prospect pipeline for transmission, defence, and renewables. Despite a lack of large orders, the sector shows resilience, although private sector ordering remains sluggish. The consistent demand indicates a stable foundation for future growth, even as companies navigate market challenges.

The capital expenditure (capex) by major central public sector enterprises rose by 2.5% year-on-year during April to July 2025. This increase reflects a positive trend, with an aggregate revenue growth of 15% year-on-year in Q1FY26, driven by strong margin performance in key companies. This growth underscores the sector's ability to adapt and thrive, even when faced with economic uncertainties.

Order inflows showed mixed results, with a 28% year-on-year increase, largely driven by EPC companies such as L&T and KPIL. There is, however, a noted weakness in private sector capex and export orders, affecting companies like ABB and SIEM. The sector's future prospects remain optimistic, with expectations of sustained growth and increased order inflows as market conditions stabilize, Motilal Oswal noted.

Export performance has shown improvement across both product and EPC segments. Companies such as Cummins, Hitachi Energy, and KOEL have reported increased export activities, although Triveni Turbine faced challenges due to geopolitical issues and deferred decision-making by international clients. This improvement in exports reflects a broader revival in global demand, crucial for sustaining long-term growth, it said.

The brokerage firm noted that Indian defence ordering pipeline remains robust, with significant prospects for emergency procurement and substantial defence orders in the pipeline. This provides a strong outlook for defence companies actively seeking opportunities in international markets. The strategic importance of these orders is expected to drive further investments and innovations within the sector.

The sector's financial metrics indicate stable margin performance, with margins broadly flat year-on-year at approximately 12%. While EPC companies experienced a slight contraction in margins due to changes in the revenue mix, product companies saw margin expansions. This stability in financial metrics is a testament to the sector's resilience and its capacity to maintain profitability amidst varying market pressures, said Motilal Oswal.

Pure capex-oriented stocks are experiencing delays in order finalisations, which presents a challenge for companies heavily reliant on private sector orders. Despite these challenges, the sector's prospects remain optimistic, with expectations of eventual recovery as market conditions improve. Companies are focusing on strategic partnerships and innovations to mitigate these challenges and capitalize on emerging opportunities.

Motilal Oswal plans to closely monitor government capex for the full year, as valuation re-rating from current levels is unlikely. Growth-oriented stocks, however, continue to attract investor interest, supported by strong performance in themes like T&D, renewables, and defence. The focus on sustainable growth and innovation is expected to drive continued interest in these stocks, it said.

While valuation re-rating remains challenging, the sector's overall performance, driven by government capex and defence orders, suggests continued investor interest. Growth stocks are expected to stay in the limelight, reflecting a balanced risk-reward ratio. The sector's resilience and adaptability position it well for future growth, making it an attractive option for investors seeking stable returns.

Stocks in key themes such as T&D, renewable, and defense remain preferred bets, while pure capex-oriented stocks are experiencing delays in order finalizations, it said. @We maintain our selective stance and prefer stocks such as L&T, KKC, and Siemens Energy in the large-cap industrial space and Kirloskar Oil Engines and Kalpataru Projects International in the mid- and small-cap segments. Bharat Electronics continues to remain our top pick in the defense sector.