Bank of America has restated a cautious outlook on India’s capital goods industry, warning that share prices have run up to levels more typical of an upcycle even though earnings have not kept pace. The bank noted that the sector has climbed 11% since the start of the Iran conflict, a rise it attributes wholly to valuation expansion rather than an improvement in earnings.
Among the capital goods names covered by the bank, including ABB, Siemens and BHEL, valuations are now near upcycle territory and measured at beyond plus two standard deviation price-to-earnings ratios, according to the bank.
On capital expenditure trends, Bank of America estimates a 10% compound annual growth rate for capex across fiscal years 2026-2028. That forecast sits below consensus expectations, which the bank says are closer to a 15% CAGR for the same period. The bank also cautioned that markets may be underestimating indirect effects from the Iran conflict on spending by private firms, the central government and state governments.
For the private sector specifically, the bank models a 7% CAGR in capex over fiscal 2026-2028. That is in line with the growth rate seen in fiscal 2024-2026 but lower than the 11% CAGR recorded in fiscal 2021-2024. The bank’s examination of investment plans for 500 listed companies suggests that macro uncertainties tied to the Iran conflict and concerns about US tariffs have constrained investment intentions despite generally strong balance sheets.
Bank of America also flagged pressures on central government finances that could weigh on broader capex forecasts. The bank pointed to an excise duty reduction on petrol and diesel amounting to 1.5 trillion rupees and fertilizer subsidies of 400 billion rupees as factors that create downside risk for government-funded spending plans.
At the state level, the bank expects many governments to prioritize delivering subsidies over new capital projects. It noted that 15 key states will hold elections during fiscal 2026-2028, and projects 10% growth in state capex for fiscal 2027 - below the 14% growth budgeted by those states.
Reflecting its overall stance, the bank assigns an underperform rating to five of the six industrial stocks it covers. Nevertheless, it identifies selective areas where it sees opportunity, including power transformers, wires and cables, data center gensets, shipbuilding and the defense sector.