India’s defence sector is entering a structural upcycle, driven by an estimated 11% CAGR in defence capital expenditure over FY2026-30, a nearly ten-fold increase in Acceptance of Necessity (AoN) approvals to ₹9.3 trillion during FY2021-26, and an accelerating push towards indigenisation, according to Kotak Institutional Equities.
The brokerage expects the share of domestic procurement to remain above 70%, up from 54% in FY2019, creating a favourable environment for local defence manufacturers. Companies with strong execution capabilities, diversified product portfolios and large order books are expected to be the key beneficiaries over the medium term.
Kotak Institutional Equities has initiated coverage on Hindustan Aeronautics Ltd (HAL) with an ‘Add’ rating, while assigning ‘Sell’ ratings to Mazagon Dock Shipbuilders (MDL) and Solar Industries, as it expects India’s defence sector to remain on a multi-year structural growth trajectory. The brokerage has also maintained its ‘Reduce’ rating on Bharat Electronics (BEL) and ‘Sell’ rating on Cochin Shipyard (CSL), citing rich valuations despite strong long-term sector fundamentals.
Defence capex to accelerate amid policy support
The brokerage noted that global military spending has climbed to nearly $2.7 trillion in CY2024 and is projected to reach $6.6 trillion by 2035, reinforcing the need for India to accelerate defence modernisation. As the world’s fifth-largest military spender at $84 billion, India is expected to increase defence capital expenditure to ₹2.8 trillion by FY2030, supported by policy initiatives such as the Defence Acquisition Procedure (DAP) 2020 and positive indigenisation lists. Kotak estimates that the sharp rise in AoN approvals could translate into ₹6.5-7 trillion worth of new defence orders during FY2027-29.
Defence exports seen reaching ₹500 billion by FY2029
Kotak Institutional Equities also expects India’s defence exports to continue their strong momentum after growing nearly 50-fold over the past decade. The brokerage believes exports could reach the government’s target of ₹500 billion by FY2029, driven by competitive indigenous platforms such as Akash, Pinaka, BrahMos and Nagastra, easing export regulations, and growing acceptance following their demonstrated combat performance. While the US remains the largest export market, Europe and Armenia are emerging as important destinations.
Drones emerge as the next growth engine
The brokerage highlighted drones as the next major growth opportunity for the sector, estimating the global military drone market will expand from around $30 billion in CY2024 to $75 billion by 2029. It expects India to spend $25-30 billion on drones and another $4-5 billion on counter-drone systems over the next decade, with companies such as Solar Industries, Bharat Electronics and Adani Defence likely to benefit from the expanding opportunity.
Valuations remain expensive despite strong growth outlook
Despite the favourable long-term outlook, Kotak Institutional Equities believes valuations across listed Indian defence companies remain demanding. The brokerage noted that the sector trades at around 50 times one-year forward earnings, compared with 28 times for global peers, reflecting expectations of faster revenue growth. While Indian defence manufacturers delivered roughly 25% revenue CAGR and expanded EBITDA margins by around 500 basis points during FY2021-26, Kotak said the profitability premium narrows after adjusting for lower research and development spending. Against this backdrop, it prefers HAL for its execution and earnings visibility while remaining cautious on MDL and Solar Industries due to valuation concerns.
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