Motilal Oswal sees 15–20% upside in L&T and BEL amid strong sector tailwinds

India's capital goods sector remains well-positioned, driven by a confluence of strong macro enablers and sector-specific catalysts.

A robust order book across key verticals such as defence, power transmission & distribution (T&D), renewables, and infrastructure is supporting steady execution visibility.

This, coupled with government policy support and easing commodity prices, has created a favourable backdrop for companies operating in the sector.

Ordering momentum continues to be resilient, led by fresh wins in the defence and infrastructure segments. Recent months have seen strong order inflows, including large-scale projects in high-speed rail, urban infrastructure, and power systems.

The railways segment, which experienced a slowdown in the previous fiscal, is now showing signs of early recovery.

Furthermore, multiple players have reported sizable contract wins across both domestic and export markets, reinforcing confidence in the near-term execution pipeline.

A notable driver is the government’s approval of emergency defence procurement worth ₹400b. This is the fifth such tranche since 2019 and is aimed at fast-tracking acquisitions of critical systems such as drones, missiles, and munitions.

These emergency authorizations come with strict delivery timelines and are expected to significantly benefit companies with indigenous manufacturing capabilities.

The inclusion of 28 additional weapon systems for emergency procurement further expands the opportunity set for defence suppliers.

Margins across the sector are expected to vary, with EPC companies benefitting from the phase-out of low-margin legacy projects, and product companies increasingly focusing on higher-value segments and deeper market penetration.

Importantly, commodity price corrections in zinc, aluminium, and copper are expected to support cost structures and provide cushion to profitability going forward.

On the global front, Indian companies are looking to tap into emerging opportunities in the US, Europe, and the Middle East.

With an established track record in quality and cost competitiveness, engineering and defence firms are accelerating their export push, especially in renewable energy and advanced defence platforms.

Overall, the outlook for the capital goods sector remains constructive. While a broad-based revival in private capex is still awaited, strong public investment, policy initiatives like Make in India, and increasing global defence and infra spending are expected to sustain growth momentum in the medium term.

Larsen & Toubro: Buy| Target Rs 4100| LTP Rs 3540| Upside 15%

Larsen & Toubro (LT) remains well-positioned to capitalize on a strong international prospect pipeline (INR19t), stable domestic order flows, and an improving return profile. Core EPC revenue is expected to grow at a 15% CAGR over FY25–28, with EBITDA/PAT CAGR of 18%/21%.

Despite geopolitical headwinds and oil price volatility, international markets—especially in the Middle East—remain promising.

RoE improved to 16.3% in FY25, supported by better capital allocation and working capital efficiency.

LT’s diversified exposure across infrastructure, energy, and hi-tech manufacturing supports long-term growth. Maintain BUY on strong execution, visibility, and return metrics.

Bharat Electronics: Buy| Target Rs 490| LTP Rs 409| Upside 20%

Bharat Electronics (BEL) is poised for strong growth, driven by a robust order pipeline and increasing indigenization in defense electronics. The company expects INR270b in order inflows and 15% revenue growth in FY26.

Significant orders like QRSAM and next-generation corvettes are anticipated in FY26-27, ensuring revenue visibility. Enhanced indigenization and consistent R&D spending will sustain strong margin performance.

With a healthy cash surplus of INR94b as of FY25, BEL has ample scope for capacity expansion, we expect a CAGR of 17%/16%/19% over FY25-27.

(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)