Defence sector report and expert insights in detail

Sector overview

The Defence Sector in India covers manufacturing and services across aircrafts, ships, land systems, electronics, drones, and ammunition. Traditionally, the sector was dominated by public sector units (PSUs), but private players are now emerging strongly. With India being the third-largest military spender in the world, the sector is positioned as a key growth engine for the next decade.

Growth Drivers 

1. Government Push – ‘Make in India, Make for the World’
   

• Strong policy support through higher budget allocations and defense procurement preference for Indian companies.
• Target to achieve defence production worth ₹1.75 lakh crore by 2025.
• Defence corridors in Uttar Pradesh and Tamil Nadu supporting industry clusters.
  

2. Export Potential
   

• India’s defence exports have grown rapidly, crossing ₹21,000 crore in FY24.
• Indian companies are supplying equipment to friendly nations, opening new revenue streams.
  

3. Private Sector Participation

• Increased opportunities for private companies in manufacturing fighter aircraft parts, missiles, drones, and shipbuilding.
• Partnerships and joint ventures with global defense majors are on the rise.
  

4. Technological Advancement

• Focus on indigenous technologies such as AI-driven surveillance, drones, radars, and missile systems.
• Growing investments in R&D and innovation hubs.

Key Challenges in Defence Sector

1. Heavy Dependence on Imports : Despite the push for self-reliance, India still imports critical high-tech systems like fighter jet engines and advanced weaponry.
   
2. Execution Delays : Large defence projects (ships, aircrafts, submarines) face delays in delivery, impacting cost and timelines.
   
3. High Capital Requirement : Defence is a capital-intensive sector with long gestation periods before companies realize profits.
   
4. Geopolitical Risks : Dependence on foreign technology partners and global supply chains makes the sector vulnerable to international disputes.

Opportunities in 2025–26

1. Rising Defence Budget : India’s FY26 defence budget is expected to rise further, crossing 3% of GDP in the coming years.
   
2. Export Growth Momentum : Countries in Africa, Southeast Asia, and Middle East are actively sourcing Indian defense equipment.
   
3. Focus on Modernization : Indian Armed Forces are rapidly modernizing fleets, replacing old aircrafts, ships, and tanks with next-gen systems.
   
4. New Areas of Growth : Space defence, cybersecurity, electronic warfare, and drone technologies are gaining traction.

Sector Outlook for 2025–26

• Positive: Strong government support, rising exports, and increasing defence spend ensure a bright outlook.
  
• Growth Areas: Aircrafts, drones, missile systems, and naval platforms.
  
• Investor View: Defence stocks are likely to remain in focus due to long-term growth potential, backed by rising order books and policy tailwinds.
  
• Risks: Delays in project execution, dependency on imports, and high valuations in some stocks

Key Players

• Public Sector: Hindustan Aeronautics Ltd (HAL), Bharat Electronics Ltd (BEL), Bharat Dynamics Ltd (BDL), Mazagon Dock Shipbuilders, Garden Reach Shipbuilders.
  
• Private Sector: Larsen & Toubro (L&T Defence), Tata Advanced Systems, Adani Defence, Bharat Forge, Paras Defence & Space Technologies.

Valuation and Stock Market Trends

Bank	CMP(in ₹)	P/E	RoCE	1Y Returns
HAL	4,473	36x	34%	-7%
Bharat Electronics	374	49x	39%	22%
Bharat Dynamics	1,517	99x	20%	16%
Garden Reach Ltd	2,552	52x	37%	43%

Recommendation: Overweight the Defence sector with a 12–18 month horizon, especially in portfolios seeking capital growth.

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Conclusion

The Defence Sector in India is transforming from being import-dependent to a self-reliant, export-oriented powerhouse. With government reforms, technology adoption, and rising demand for modern defence equipment, the sector is set for robust growth in the next few years. For investors, this remains one of the most promising long-term themes in India’s growth story.