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Capital Goods Q1FY26 Results: Good start for FY26

ICICIdirect Research 01 Aug 2025 DISCLAIMER

L&T: Stellar Set (Mcap; Rs 495000 crore, CMP Rs 3610, Target: Rs 4380, Upside; 21%)
L&T reported strong performance for Q1FY26 across all parameters. The company reported robust order inflows (OI) of ₹94,453 crore up 33% YoY, mainly led by energy business which formed 35% of OI. The current order backlog (OB) stands at ₹612,761 crore up 25% YoY. The current pipeline stands at Rs 14.8 lakh crore vs. Rs 9 lakh crore YoY.
Strong execution in the Energy Projects (revenues up 47% YoY) led to consolidated revenue growing by 16% YoY to ₹63,679 crore for Q1FY26. Consolidated EBITDA Margins came in at 9.9% down 30 bps YoY due to change in project mix. Consequently, PAT came in at ₹3617 crore up 30% YoY.
The NWC ratio to sales improved significantly (380 bps) to 10.1% in Q1FY26 YoY from 13.9% last year. The company generated Rs 6200 crore of operating cash flow in a seasonally weak quarter. The ROE of the company improved 230bps YoY to 17% in Q1FY26. L&T has reached ROE of ~17% and anticipates the same to reach 18% by FY26E as per their strategic plan. The company is working on improvement from 3 catalysts like a) Breakeven of Hyderabad Metro, b) Improvement in P&M segment margins and c) increasing payouts in forms of higher dividends or buybacks
L&T has maintained guidance of 15% revenue growth, 10% order inflow growth, 8.3-8.5% margin and 12% NWC to sales for FY26E which we believe will be surpassed on most of the parameters. Going ahead we expect the company to report revenue and PAT CAGR of 14.5% and 19% over FY25-FY27E. We rate the stock buy based on SoTP valuations.
 
KEC International: Stellar Set (Mcap; Rs22600 crore, CMP Rs 850, Target: Rs 1080, Upside; 27%)
KEC International (KEC) reported a healthy Q1FY26 with Revenue at ₹5023 crore up 11% YoY, mainly from T&D business which grew 26% YoY. The renewables and cables business grew by 87% and 5% YoY to ₹136 crore and ₹383 crore, whereas the transportation business was flat and the Civil and Oil & Gas business declined by 11% and 52% YoY respectively.
The order inflows for Q1FY26 at ₹5517 crore (of which T&D & Civil are 59% & 38%), current order backlog at ₹34409 crore, additionally L1 of ~₹6000 crore. The company has maintained its order inflow guidance of 28000-30000 crore for FY26 which is well supported a strong tendering pipeline of Rs 180000 crore. T&D forms 50% of business pipeline out of which both domestic and international prospects are quite strong.
Led by better operational performance, rise in T&D execution (64% revenue mix from 55% last year) consolidated EBITDA grew 29% YoY to ₹324 crore, EBITDA Margins expanded ~93 bps YoY to 6.93%. As a result PAT at ₹125 crore, up 42% YoY, PAT margins expanded 56 bps YoY to 2.5%.
The company believes the domestic T&D and civil to grow in the range of 30-40% and 25% in FY26E. We build in a margin of 8.2% and 8.8% for FY26E and FY27E. The recovery in margins will emanate from factors like a) strong growth in T&D business which earns double digit margins, b) run down of low margin railway order and other legacy orders
On a whole we expect revenues and PAT to grow at a CAGR of 14% and 51.6% respectively over FY25-FY27E which will lead to rerating of the stock with improved return ratios (ROCE to expand 15.3% in FY25 to 22.7% in FY27E). We ascribe a PE of 22x on FY27E EPS and rate the stock as Buy.

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