Indian defence companies have consistently reported stronger profitability than many of their global counterparts in recent years. At first glance, the numbers suggest domestic manufacturers are more efficient and generate better operating margins than some of the world’s biggest defence contractors.
However, a new analysis by Kotak Institutional Equities argues that this profitability edge is, to a large extent, an accounting and business-model effect rather than evidence of superior operational efficiency.
The report says Indian defence manufacturers benefit from significantly lower research and development (R&D) expenditure because much of the fundamental research is undertaken by the government through the Defence Research and Development Organisation (DRDO). As a result, companies report healthier margins than global peers that spend heavily on developing next-generation technologies in-house.
The 800 basis point margin gap
According to Kotak Institutional Equities, Indian defence companies reported an average EBITDA margin of around 22% during FY2021-25, compared with roughly 14% for global defence manufacturers, an apparent advantage of about 800 basis points.
However, when analysts adjust these margins to account for differences in R&D spending, the profitability gap shrinks to around 450 basis points.
In other words, a meaningful portion of the higher margins reported by Indian companies stems from lower R&D intensity, rather than purely stronger operating performance or better cost efficiencies.
Why Indian companies spend less on R&D
The report says Indian defence firms spent an average of 3.5% of revenue on R&D between FY2021 and FY2025, compared with 5.9% for global peers—nearly twice as much.
This difference is structural and reflects the way India’s defence ecosystem has evolved.
Unlike global defence giants, Indian manufacturers rely heavily on DRDO for core technology development. The government-funded research organisation develops key technologies and then transfers them to industry for commercial production, allowing companies to avoid much of the upfront cost and risk associated with developing advanced defence systems.
In FY2024 alone, DRDO signed more than 250 technology transfer (ToT) licensing agreements with Indian companies, reinforcing its role as the country’s primary defence research engine.
Make in India has accelerated indigenous manufacturing
The model has gained further momentum under the government’s Make in India and Aatmanirbhar Bharat initiatives, which aim to reduce dependence on imports and build a self-reliant defence manufacturing ecosystem.
Instead of designing every major platform from scratch, many Indian companies manufacture or indigenise proven systems through technology transfer (ToT) agreements with foreign original equipment manufacturers (OEMs). This approach enables faster localisation of production, strengthens domestic manufacturing capabilities and supports import substitution while keeping development costs relatively low.
The strategy has helped domestic defence companies expand production, improve execution and win larger government orders without incurring the same level of research expenditure seen among global defence majors.
Global players invest in breakthrough technologies
The business model followed by global defence companies is markedly different.
Major international OEMs invest heavily in developing proprietary technologies and next-generation military platforms, including hypersonic weapons, directed-energy systems, autonomous platforms, advanced sensors and electronic warfare capabilities.
Such long-term investments significantly increase R&D costs, depressing operating margins in the near term but creating intellectual property, export opportunities and technological leadership over time.
Innovation gap extends beyond spending
Kotak’s findings are also supported by a study from FAST India, which highlights the innovation gap between Indian and global defence manufacturers.
According to the study, Indian defence companies generate only around 7.3 patents for every US$1 billion in revenue, compared with nearly 240 patents per US$1 billion among global peers.
The disparity suggests that India’s challenge extends beyond lower R&D expenditure and includes relatively lower levels of proprietary innovation and intellectual property creation.
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