India’s defence ecosystem is rewriting the record books. Production has touched a record Rs 1.78 lakh crore in FY26, exports have climbed to an all-time high, and the government’s push towards self-reliance continues to gather pace.
The brokerage house Nuvama, in its latest report, has pointed out why investors need to rethink how they approach defence stocks.
The brokerage believes the next phase of wealth creation may not necessarily come from companies with the biggest order books. Instead, it expects companies that can execute projects faster, localise production and convert orders into earnings more efficiently to stand out.
So, why is the investment strategy changing? Here’s what Nuvama believes.
India’s defence ecosystem is entering a new phase
Nuvama noted that India’s defence industry is moving beyond simply building domestic manufacturing capacity.
“India’s defence ecosystem continues to scale, with FY26 production reaching an all-time high of Rs 1.78 trillion (+15.6% YoY; +110% versus FY21) and exports hitting a record Rs 384 billion. Private sector contribution expanded to 24% (Rs 42,000 crore),” added the brokerage house.
The brokerage believes the sector is now shifting towards deploying more advanced defence systems rather than just replacing imports.
It said, “With India’s defence production scaling to Rs 1.78 trillion in FY26, we believe the sector is transitioning from building domestic manufacturing capability to accelerating deployment of advanced defence systems.”
As per the brokerage report, the focus is gradually shifting towards missiles, air defence systems, electronic warfare, radars, unmanned platforms and precision ammunition.
Why execution may matter more than order books
While large defence companies continue to enjoy strong order pipelines, Nuvama believes investors should now pay closer attention to execution.
According to the Nuvama report, “While structural tailwinds remain intact, we believe stock-level differentiation will be driven by execution and localisation.”
The report explains that companies with shorter execution cycles are likely to convert orders into revenue and profits much faster than those handling large, complex defence platforms that require longer delivery timelines.
It further added, “We prefer players with faster execution cycles, higher localisation and superior margin profile, favouring consumable-led plays (Solar Industries India) and defence electronics/subsystems (Bharat Electronics, Data Patterns (India)).”
Government approvals could support the next growth cycle
Another factor supporting the brokerage’s view is the government’s recent procurement approvals.
According to Nuvama, “The recent Rs 520 billion AoN approvals further validate this shift towards operational readiness and technology-intensive procurement.”
Acceptance of Necessity (AoN) approvals are expected to support procurement across advanced missiles, precision-guided ammunition, electronic warfare systems and modern defence equipment.
The brokerage believes these areas directly benefit companies with stronger domestic capabilities and faster execution.
Why BEL, SOIL and Data Patterns DPIL are the preferred picks
Among the listed defence companies, Nuvama has identified Solar Industries India (SOIL), Bharat Electronics (BEL) and Data Patterns (India) (DPIL) as its preferred ideas.
It said, “We prefer BEL, DPIL and SOIL, given higher localisation, shorter execution cycles and superior margin profile, while HAL and BDL remain relatively more exposed to complex programme execution and supply-chain dependencies.”
Nuvama in its report noted, Bharat Electronics is expected to continue benefiting from operational efficiencies and localisation, while Solar Industries and Data Patterns could gain from favourable product mix, operating leverage and relatively shorter execution cycles.
What to expect from Q1FY27 earnings
Nuvama expects the June quarter to reflect the growing divergence within the defence sector.
“BEL is likely to deliver steady execution with sustained 27%+ margin, supported by operational efficiencies and localisation benefits. SOIL and DPIL should continue to benefit from the favourable defence mix, operating leverage and shorter-cycle opportunities,” added Nuvama in its report.
“Conversely, HAL’s execution remains constrained by LCA Tejas/other platform deliveries, while BDL’s recovery hinges on improved execution run-rate and margin normalisation,” added the report
Nuvama’s top defence sector picks
The brokerage also highlighted its preferred investment ideas.
As per the report, Solar Industries India (SOIL) is Nuvama’s top pick, with earnings expected to grow at around 39% annually between FY26 and FY28. Bharat Electronics (BEL) is also among its preferred stocks, with earnings expected to grow by around 14% annually over the same period. The brokerage expects both companies to continue generating healthy returns on shareholders’ equity.
Disclaimer: Investment in the securities market involves inherent market risks. The analysis and stock preferences highlighted in this article reflect the specific institutional findings and research viewpoints of Nuvama, rather than the independent editorial views or personal recommendations of this publication. Prospective investors should thoroughly analyze their risk appetite, financial parameters, and investment time horizons, or consult a SEBI-registered investment advisor, before acting on individual stock strategies, projections, or earnings forecasts related to the defense ecosystem. This disclaimer has been generated using AI to support user well-being and responsible content consumption.