Capital Goods Sector Sees Mixed Q2 Outlook Despite Strong Government Spending

The S&P BSE Capital Goods index rallied 21% in the past six months, fueled by key developments, including a 43% surge in the Union government’s capital expenditure to ₹4.3 trillion in the first five months of FY26. → Another major catalyst is the defense ministry’s plan, targeting annual spending of $25−30 billion (₹2.2−2.6 trillion) over the next 15 years. → Capital goods firms are expected to report decent Q2 earnings, with Nomura projecting 15% year-on-year (y-o-y) revenue and EBITDA growth, driven by strong execution of record-high order books. → However, margins are expected to be under pressure due to higher commodity prices (e.g., copper and aluminum) and lower exports, which typically yield higher margins. → The solar equipment segment is forecast to lead the growth with nearly 40% revenue growth and a substantial 500-800 basis points margin expansion. → Transmission and Distribution (T&D) companies are also anticipated to post healthy revenue growth (over 20%) due to strong domestic demand, driven by data centers and power T&D projects. → Heavyweights like

and are expected to see solid revenue growth from the execution of their large project order books. → Conversely, firms making products like abrasives, adhesives, and industrial machinery (turbines, motors) are expected to report subdued revenue growth and lower margins due to weaker exports, pricing pressure, and Chinese dumping. → Despite massive order inflows (defense firms' aggregated order inflows grew 23% to ₹1.8 trillion in Q2), defence companies will likely report below-average revenue growth (11%) and lower margins due to increased material costs. → A crucial sector trigger—the revival of private capital expenditure (capex)—is missing, with the value of new private capex announced in Q2 declining 46% to a five-quarter low.