Defence sector stocks are in focus given the rising tension about the US-Iran situation. However, that’s not the only trigger for the defence sector in the near-term. A combination of strong quarterly performance and record procurement proposals have put the sector back in limelight.
At the centre of the conversation is Hindustan Aeronautics (HAL), the state-run aerospace and defence manufacturer company. Beyond HAL, other defence players could also see opportunities after fresh approvals from the government.
Let’s take a look at what the brokerages are saying and what it means for investors tracking the sector.
Kotak Institutional Equities on defence approvals and sector impact
The big trigger – Rs 3.6 lakh crore defence approval
The larger boost for the defence sector stocks came after the Defence Acquisition Council (DAC) approved procurement proposals worth Rs 3.6 lakh crore.
According to a report by Kotak Institutional Equities, nearly 90% of this outlay, around Rs 3.2 lakh crore, is allocated to the procurement of 114 Rafale fighter jets.
The report stated, “Govt approves largest ever AON (Acceptance of Necessity) of Rs 3.6 lakh crore led by Rafale acquisition.”
With this approval, total AON clearances in FY26 have reached Rs 6.9 lakh crore, nearly three times last year’s level.
According to the brokerage house, “With this approval, 26 AoN clearances have surged to Rs 6.9 lakh crore so far in FY26, nearly three times last year (Rs 2.5 lakh crore), highlighting a clear push to modernise India’s military infrastructure.”
Who benefits from the Rafale order?
Of the 114 Rafale jets, around 90 are expected to be manufactured in India with nearly 50% indigenous content. While final roles are yet to be confirmed, domestic companies may gain from manufacturing and integration work.
Kotak Institutional Equities noted, “Domestic players expected to play a big role in the Rafale order.” Hindustan Aeronautics could benefit given its past experience in licence production of fighter aircraft.
Other potential beneficiaries include Bharat Electronics (BEL) for avionics and radar systems and Bharat Dynamics (BDL) for missile systems. Private sector players involved in component manufacturing may also participate.
However, as the brokerage report also noted that the execution timelines and exact allocation of work are yet to be finalised.
Elara Capital on HAL
HAL’s numbers – Steady growth, expanding margins
Elara Capital has retained its “Accumulate” rating to Hindustan Aeronautics and raised the target price to Rs 4,700. This translates to an upside of 13% from the current market price. The brokerage expects an earnings Compound Annual Growth Rate (CAGR) of 7% between FY25-28, with Return on Equity (ROE) of 23% during the same period.
Elara Capital in its report noted that HAL reported a strong revenue growth in the Q3FY26. Revenue rose 11% YoY to Rs 7,700 crore, largely driven by higher manufacturing activity.
The brokerage noted, “Revenue rose 11% YoY to Rs 7700 crore in Q3FY26, as estimated, with guidance of 8-10% sales growth in FY26, followed by double-digit growth thereafter.”
Manufacturing revenue is estimated to have grown around 25% YoY. This is supported by the execution of AL-31FP engines and helicopter programs. Repair and overhaul (ROH) revenue also saw steady growth.
Margins were another highlight. As per the brokerage report, “Adjusted EBITDA surged 33% YoY to Rs 2,240 crore with margin expanding 480bp YoY to 29%.” EBITDA margins improved mainly due to operating leverage, meaning higher production helped spread fixed costs better.
Beyond fighter jets: HAL’s long runway
While HAL was not included in the Advanced Medium Combat Aircraft (AMCA) design role, the brokerage believes the company still holds a strong position.
The report highlighted, “Hindustan Aeronautics, beyond AMCA (Advanced Medium Combat Aircraft), still a prime player.” It added that the company has an order pipeline of Rs 3 lakh crore in aircraft and helicopters, where HAL is the sole beneficiary.
Ongoing and developmental programs include Tejas Mk II, the Sukhoi-30 upgrade, Dornier 228 aircraft, Twin Engine Deck Based Fighter (TEDBF), Combat Air Teaming System (CATS) Warrior Unmanned Combat Aerial Vehicle (UCAV), and several helicopter projects such as the Light Utility Helicopter (LUH) and Light Combat Helicopter (LCH Prachand).
There is also potential in maintenance, repair and overhaul (MRO) services and civil helicopter manufacturing. However, risks remain, including delays in engine supplies and execution challenges.
Conclusion
Overall, the brokerages believe the defence sector is entering a phase of stronger visibility. The government’s push to modernise is a clear trigger for the defence sector stocks. This is backed by solid order books. Execution and better visibility on those lines remain the key factor to monitor going forward.