India’s defence sector has been one of the strongest performing themes in the stock market over the past few years. For instance, rising government spending, growing exports and a stronger push towards manufacturing defence equipment within India have kept investors interested.
But with many defence stocks already trading at expensive valuations, where does the next opportunity lie?
According to the latest report by Kotak Institutional Equities, the long-term growth story remains intact. However, the brokerage believes investors also need to pay attention to valuations, execution capabilities and future order inflows before chasing the sector.
So, which companies are on Kotak’s radar? And what are the biggest themes shaping India’s defence and aerospace industry?
Why Kotak believes the defence cycle is far from over
According to the brokerage report, India’s defence industry is entering a multi-year investment cycle backed by government policy and rising military spending.
Kotak said, “We believe India’s defence sector is on a multi-year structural upcycle.”
As per the brokerage report, defence capital expenditure is expected to grow at a compound annual growth rate (CAGR) of around 11% between FY26 – FY30.
The brokerage also pointed out that Acceptance of Necessity (AoN) approvals have increased nearly tenfold over the past five years. These approvals are the first step before the government places large defence orders.
It added, “AoN approvals have surged 10x over FY21-FY26, implying Rs 6.5-7 trillion in new orders during FY27-FY29.”
As per the report, policy initiatives such as the Defence Acquisition Procedure (DAP) 2020, which requires higher domestic content in defence purchases, continue to support local manufacturers.
Exports are becoming a much bigger growth driver
The brokerage believes defence exports are no longer a small opportunity. The report notes that India’s defence exports have increased nearly fifty times over the past decade. Indian-made missile systems, artillery platforms and defence equipment are now finding buyers across several countries.
Exports touched Rs 38,400 crore in FY26, and the government aims to increase this to Rs 50,000 crore by FY29.
The report noted that apart from the United States, countries in Europe and Armenia are emerging as important export markets for Indian defence companies.
Why drones could become the next big opportunity
One area where Kotak sees significant long-term potential is military drones. The brokerage believes drones are changing modern warfare by reducing costs while improving surveillance and strike capabilities.
It said, “Drones are fundamentally transforming warfare economics.”
The report added that the global military drone market, currently estimated at around $30 billion, could grow to nearly $75 billion by 2029. Kotak estimates India itself could spend $25-30 billion on military drones and another $4-5 billion on counter-drone systems over the next decade.
Furthermore, the report highlighted that companies such as Bharat Electronics (BEL), Solar Industries India and Adani Defence could benefit from this opportunity.
Which defence stocks does Kotak like?
Kotak believes valuations have become demanding after the sharp rally seen in many defence stocks.
The brokerage said, “Indian defence companies trade at a 50% valuation premium over global peers.”
It has initiated coverage on Hindustan Aeronautics with an ‘Add’ rating and a fair value of Rs 4,810.
However, it has started coverage on Mazagon Dock Shipbuilders with a ‘Sell’ rating and a fair value of Rs 1,950.
Similarly, Solar Industries India has also received a ‘Sell’ rating with a fair value of Rs 10,300.
Kotak has maintained its earlier ratings of ‘Reduce’ on Bharat Electronics and Cochin Shipyard.
Key things investors should watch
According to the Kotak Institutional report, rising government spending, increasing localisation, expanding exports and higher procurement approvals continue to support long-term growth.
However, Kotak believes stock selection is becoming increasingly important as valuations across the sector have moved well above global peers.
Disclaimer: Investing in defence sector stocks involves significant market risk due to demanding valuations and dependencies on government procurement, budgetary allocations, and executing large order books. The stock ratings, fair value targets, and sector projections cited from the Kotak Institutional Equities brokerage report are intended for informational and educational purposes only and do not constitute direct buy, sell, or hold recommendations or a solicitation to trade. Investors should conduct independent research, evaluate their risk appetite, and consult a SEBI-registered investment advisor before making any financial commitments. This disclaimer has been generated using AI to support user well-being and responsible content consumption.
