India’s defence sector enters structural growth phase as brokerages see deep-tech, exports driving next leg

PL Capital in its latest report estimates that nearly 75% of defence capital procurement is now reserved for domestic sourcing, with opportunities increasingly shifting from complete platforms to high-value subsystems such as semiconductors, processors, seekers, sensors and mission-critical electronics. It expects value creation to migrate towards software, artificial intelligence, electronic warfare and command-and-control systems, with companies investing in research and development and owning core technologies likely to capture a larger share of future defence spending.The brokerage identified drones and counter-drone systems as the biggest near-term opportunity. It projects India’s drone market to reach $11.1 billion by 2030, while defence procurement in the segment could increase from Rs 20-30 billion in the previous cycle to around Rs 130 billion currently and nearly Rs 300 billion in the next procurement cycle. Learnings from Operation Sindoor have also accelerated procurement of indigenous drones, counter-drone systems and autonomous technologies, it said.

As modern warfare becomes increasingly software-driven, electronics are expected to account for a larger share of the value of defence platforms. PL Capital sees growing opportunities in C4ISR systems, software-defined radios, missile electronics and command-and-control systems, while directed-energy weapons, high-power lasers and autonomous platforms are emerging as new growth verticals. Bharat Electronics plans to invest more than Rs 150 billion in research and development over the next five years, underscoring the industry’s growing focus on technology leadership.

MOFSL on the other hand expects replenishment of ammunition and missile inventories, platform upgrades and modernisation programmes following recent geopolitical conflicts to drive ordering over the next two years. The brokerage expects procurement of drones, anti-drone systems, electronic warfare, air-defence control systems and active protection systems to gather pace from FY27 alongside large platform contracts.

The brokerage highlighted a sizeable pipeline of programmes, including the Rs 700 billion P75I submarine project, Rs 330 billion worth of next-generation corvettes, the Quick Reaction Surface-to-Air Missile (QRSAM) system, landing platform docks and the Advanced Medium Combat Aircraft (AMCA) programme. Hindustan Aeronautics has guided for a near-term order pipeline of around Rs 900 billion, including orders for 143 Advanced Light Helicopters, Sukhoi upgrades and Dornier aircraft, while Bharat Electronics expects opportunities across QRSAM, naval multi-function radars, electronic warfare systems and submarine programmes.

Industry fundamentals are also strengthening. MOFSL noted that India’s defence production rose 16% year-on-year to Rs 1.78 trillion in FY26, while exports surged 63% to Rs 384 billion, with Indian defence equipment now reaching more than 80 countries. The brokerage expects exports to remain a key growth driver as domestic companies expand supplies of missiles, radars, naval platforms and strategic electronics while increasing indigenous value addition.

Similarly, Kotak Institutional Equities also expects FY27 to mark an inflection year for the sector, supported by healthy order books, improving execution and rising export opportunities. It said companies across precision engineering, defence electronics, RF and microwave systems, anti-drone platforms and aerostructures indicated demand visibility of two to four years, backed by increasing localisation and stronger procurement from defence public sector undertakings.The changing opportunity set is also reflected in company outlooks. MTAR Technologies reiterated guidance for around 80% revenue growth in FY27 to about Rs 16 billion, with its order book expected to nearly double to Rs 50 billion by the end of FY27. Zen Technologies maintained its target of generating Rs 40 billion in cumulative revenue over the next two years, driven by military simulators and anti-drone systems, while expecting exports to increase from around 12% currently to high-double digits over the medium term. Astra Microwave Products expects indigenous opportunities in AESA radars, missile seekers and electronic warfare systems to support growth, while Raghu Vamsi Aerospace is expanding into aero-engine components, loitering munitions and autonomous systems to capitalise on global supply-chain diversification.

The positive outlook has also been reflected in brokerage recommendations despite elevated sector valuations. MOFSL reiterated BUY ratings on Bharat Electronics, Hindustan Aeronautics and Astra Microwave Products, valuing BEL at 43.6 times FY27 estimated earnings with a target price of Rs 510, HAL at 29.8 times FY27 earnings with a target of Rs 5,500, and Astra Microwave at 59.8 times FY27 earnings with a target of Rs 1,580. It maintained Neutral ratings on Bharat Dynamics, which trades at 71.9 times FY27 earnings, and Zen Technologies, at 56.2 times FY27 earnings.

 

While large platform orders are expected to remain the backbone of defence spending, brokerages increasingly see the next phase of value creation shifting towards companies with capabilities in defence electronics, autonomous systems, sensors, artificial intelligence and proprietary technologies. With the government targeting Rs 3 trillion in defence production and Rs 500 billion in defence exports by FY30, they expect the sector’s growth runway to extend well beyond the current order cycle.