India’s defence sector is one of the most discussed investment themes in recent times. The brokerage firm Emkay has picked four names it believes are set to gain, with one clear favourite leading the pack.

According to the brokerage report, Hindustan Aeronautics, Bharat Electronics, Bharat Earth Movers and Bharat Dynamics are its preferred names in the sector. The brokerage sees potential upside of up to 26% across these stocks, with Hindustan Aeronautics as its top pick.

Let’s take a look at why the brokerage house is bullish on these stocks and what is the rationale behind it –

Why is the defence sector in focus?

The scale of India’s defence manufacturing has changed significantly over the past few years. 

According to the brokerage report, defence production reached a record Rs 1.8 trillion in FY26, while exports stood at Rs 38,000 crore.

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India has set another target for 2029, a defence production of Rs 3 trillion and exports of Rs 50,000 crore.

According to Emkay, “We believe the domestic defence sector is well poised to deliver sustained growth in coming years, supported by continued policy support, increased private-sector participation, and rising export capabilities.”

Here’s a look at the key stocks that could potentially benefit – 

HAL: Emkay’s top pick

Hindustan Aeronautics (HAL) is the brokerage’s preferred stock in the sector. Emkay has initiated coverage with a ‘Buy’ rating and a target price of Rs 5,950. This translates to an upside potential of 23% from the current market price.

The brokerage expects execution of the Light Combat Aircraft Tejas Mk1A order to support HAL’s operational performance. It expects earnings to grow at a compound annual growth rate of 13% between FY26-29.

“HAL is our top pick in the sector,” Emkay said.

The brokerage also highlighted the company’s long-term earnings visibility and return ratios while noting that the stock is trading at 32 times estimated first-half financial year 2029 earnings per share.

Emkay on BEL: Up to 26% upside likely

Bharat Electronics (BEL) comes next, with Emkay assigning a ‘Buy’ rating and a target price of Rs 500. This represents a potential upside of 26% from the current level.

The report added that BEL’s order pipeline and spending on research and development could support growth. The company is also benefiting from rising electronics content in defence equipment.

“BEL’s consistent execution track record, high R&D expenditure toward scaling up indigenization levels, increasing electronics content in defense equipment, and a pipeline of large-ticket programs provide confidence that it can continue delivering mid-teen earnings growth in coming years,” added the brokerage house report

Emkay on BEML: Three growth engines

Bharat Earth Movers (BEML) has also received a ‘Buy’ rating, with a target price of Rs 2,600, indicating 24% potential upside.

According to Emkay, BEML has exposure to three different growth areas. Its Rs 21,700 crore order book provides visibility through FY29, while opportunities in trains and metro projects could add to the pipeline.

“BEML offers rare exposure to three structurally distinct growth vectors.”

The brokerage expects margins to improve as the company executes more high-margin orders.

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Emkay on BDL: Growth comes with challenges

Bharat Dynamics (BDL) has a relatively cautious view from Emkay. The brokerage has assigned an ‘Add’ rating with a target price of Rs 1,350, implying 13% upside.

According to the report, increased competition and higher research and development spending could weigh on margins in the near term.

“Given its premium valuation and mixed execution track record, we initiate coverage on BDL with ADD,” the report noted.

What investors need to watch 

Emkay’s defence coverage highlights four stocks with different growth drivers. While Hindustan Aeronautics is the brokerage’s top pick, Bharat Electronics, Bharat Earth Movers and Bharat Dynamics have their own opportunities and challenges.

Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.