BHEL and L&T are poised for positive earnings surprises this quarter. Renu Baid Pugalia from IIFL Institutional Equities said, "From the second quarter results perspective, we definitely see strong positive tailwinds for L&T, BHEL." Strong execution and margins should support growth for these firms despite slower domestic order inflows recently.
Renu Baid Pugalia, Senior Vice President – Research at IIFL Institutional Equities, expects the capital goods sector to remain in focus this earnings season, with Bharat Heavy Electricals Ltd (BHEL) likely to report the strongest improvement. She believes execution and margins will continue to support earnings across the sector, while order inflows are expected to improve in the second half of the financial year.
Baid expects BHEL, Larsen & Toubro (L&T), CG Power and MTAR Technologies to remain key beneficiaries of the ongoing investment cycle. While domestic ordering has been slower in recent months, she believes healthy order books and improving execution should continue to support earnings growth.
Baid said L&T and BHEL could deliver positive earnings surprises compared with market expectations. "From the second quarter results perspective, we definitely see strong positive tailwinds for L&T, BHEL," she said, adding that CG Power should report a steady quarter, while MTAR Technologies could post strong results among the small and mid-cap names.
Among the companies under her coverage, Baid is most optimistic on BHEL, which she believes is emerging from a prolonged execution slowdown. She expects the company to report sales growth of more than 25%, operating margins of over 10%, and nearly double its profit year-on-year.
"We see sales growing in excess of 25% for them, and margins probably this quarter should be touching 10% plus margins, which could drive almost 2x profit this quarter on a YoY basis," she said.
Baid added that BHEL's earnings could trigger upgrades despite slower order inflows this year. "We will see earnings upgrade happening both on execution and margin front, and that should support the stock price movement," she said. While fresh order wins have moderated after last year's strong base, she noted that the company's order backlog remains robust at 6.9 times trailing 12-month sales, with order inflows expected to improve in the second half of the year.
For L&T, Baid expects the core business to deliver around 15% revenue growth, while EBITDA could rise 34% year-on-year, supported by stable margins of about 7.2%. She also expects CG Power to post around 20% revenue growth and 23% earnings growth, aided by its recently commissioned capacity and continued strength in the power systems business.
On the broader power equipment sector, Baid said domestic ordering has remained soft, but companies with healthy execution pipelines and export exposure are well positioned. She expects transmission and distribution equipment makers to continue benefiting from strong order books even as domestic base orders gradually recover.