In a large, fast-growing economy like India, there is no shortage of wealth-creating opportunities.
Investors will always find at least a few high growth sectors that they are interested in.
Electric vehicles, data centers, renewable energy, fintech, AI… there are so many new themes in the stock market that didn’t exist 10 years ago, or even 5 years ago.
Understandably, investors get very excited about these money-making opportunities.
However, these days in the stock market, one investing theme, one sector, stands above all as potentially, the most promising.
It’s the defence sector.
The recent terrorist attack in J&K has been the trigger for the rise in defence stocks, but the trend is long-term in nature. These stocks have a huge runway ahead on them. And investors should have these stocks on their watchlists.
India’s preparedness with respect to defence supplies and ability to indigenously manufacture hi-tech defence armaments, will determine our geopolitical strength.
In this editorial, we will discuss this sector in detail.
The Long-Term Potential
The defence ministry recently declared that 2025 will be the ‘year of reforms’ for Indian defence.
This means there could be massive changes in the sector, ensuring better availability of raw materials, growth in order books, more private participation etc.
Historically, India relied heavily on foreign countries for its defence needs. About 65-70% of defence equipment were imported until 2018.
However, this landscape has dramatically shifted, with around 65% of defence equipment now manufactured within India. This transformation reflects the country’s commitment to self-reliance.
Moreover, the strength of India’s defence industrial base, which comprises 16 defence PSUs, several private conglomerates like the Tatas and L&T, over 430 licensed companies, and approximately 16,000 MSMEs has become robust.
In 2024, 21% of India’s defence production came from the private sector and this share is set to go up.
Consequently, the annual defence production is expected to cross the target of Rs 1.75 trillion (tn) by the end of FY25. The aspiration is to achieve Rs 3 trillion worth of defence production by 2029. This would solidify India’s position as a global defence manufacturing hub.
India’s defence exports have reached an all-time high, surging from Rs 6.8 bn in financial year 2014 to Rs 210 bn in FY24. This remarkable growth of over 30 times in export value over the past decade shows India’s defence sector’s resilience to volatilities in domestic defence expenditure.
The Government’s Unwavering Support
The defence budget reached a record allocation of Rs 6.21 trillion (tn) for FY25, an increase of 4.7% from FY24. This amount is about 13% of the total budget.
In FY26, the allocation will break all records – Rs 6.8 tn. This figure includes Rs 1.8 tn for military modernisation, also a record.
The amount for capital acquisitions, was 1.72 tn or about 27.7% of the total defence budget.
Rs 1 trillion was also allocated to deep tech as very long-term low/zero interest loans. This is aimed at incentivising industry to step up their R&D investments and develop cutting-edge technologies for the Indian armed forces.
Many defence companies especially those in high-tech segments like sensors, radars, missiles, drones, etc will benefit from this spending in the short-term and long term.
Back in July 2024, the defence ministry updated its positive indigenisation list.
The positive indigenisation list consists of 346 strategically important items. These include line replaceable units, major systems and sub-systems, assemblies and sub-assemblies, various spare parts, components, and raw materials.
These items can now only be procured within the country from defence PSUs. It’s expected that imports worth about Rs 10.5 bn will now be substituted by domestic production.
This was the fifth in a series of positive indigenisation lists released by the defence ministry aimed at boosting domestic defence manufacturing and curbing imports. As per the ministry, over 12,300 items have already been indigenised over the years due to this effort.
These lists are in addition to the five positive indigenisation lists of the department of military affairs. These lists include more complex military items like large weapon systems, sensors, and ammunition.
The Export Boom
India has for many decades been among the largest global arms importers. The government wants to turn the situation around. The goal is to make India one of the world’s largest arms exporters.
Some of the policy reforms of the government in the past few years to boost Indian defence are simplification of licensing procedures, removal of parts and components from the license regime, extending the validity period of licenses, etc.
Instead of relying on imports, defence PSUs now produce an increasingly large number of defence products domestically. They also have to compete with the private sector to win orders.
These triggers increased productivity as well as an increased focus on quality control and innovation. Defence PSUs have tied up with research institutions to improve their products. This has enabled these companies to pitch their products in international markets.
Has the plan worked?
Well, the numbers speak for itself.
Defence exports have surged to a record high of Rs 236.22 bn (US$ 2.76 billion) in FY25. This was a growth of 12.04% over FY24.
The defence PSUs have shown a significant increase of 42.85% in their exports in FY25 reflecting the growing acceptability of Indian products in the global market and the ability of the Indian defence industry to be a part of the global supply chain.
India has evolved from a largely import-dependent military force to one increasingly focused on self-reliance and indigenous production. Ammunition, arms, sub-systems/systems and parts & components have been exported to around 80 countries in FY25.
3 Defence Stocks for Your Watchlist
Here are three defence stocks you should have on your watchlist.
- Bharat Dynamics
Bharat Dynamics has been powering India’s defence ambitions, manufacturing guided missiles and allied systems for the armed forces. The company’s missile capabilities include production, life-cycle support, and refurbishment.
The pipeline looks promising, with an estimated Rs 200 bn in new orders over the next two to three years. Surface-to-air missiles and anti-tank guided missiles (ATGMs) are leading the charge.
Bharat Dynamics is also diversifying, aiming to expand into warhead manufacturing and even products for space applications, opening up entirely new revenue streams.
The company’s focus on indigenisation is already paying dividends, with cost savings and reduced import dependency making it more competitive in the defence landscape.
- HAL
HAL is a leading player in the aviation and aerospace sector with a significant position in manufacturing fighter jets, helicopters, and other aircraft for the Indian Air Force and Navy.
The order book of the company stands at over Rs 900 bn with ongoing production of Tejas fighter jets and advanced helicopters, such as the Light Combat Helicopter (LCH).
Looking ahead, HAL expects orders worth Rs 1.6-1.7 tn over the next three years. Its robust capex plan of Rs 30 bn annually through FY30 aims to expand manufacturing lines and enhance R&D capabilities.
The budget could focus on the Indian Air Force’s pending capital acquisitions. In this case, HAL will benefit from new orders of indigenous aircraft systems.
- Mazagon Dock Shipbuilders
Mazagon Dock is well known for producing submarines and warships. The order book of the company currently stands at Rs 400 bn.
The company’s current projects include stealth frigates and submarines. With spending likely to be planned for the upgrade of the Navy’s submarine and development of indigenous warships, the company is expected to see an uptick in new orders.
Also, with a Rs 30 bn investment planned over the next 3-4 years, Mazagon Dock is aiming to expand its production capacity to handle larger and more complex military vessels. This is supported by the company’s free cash reserves of Rs 40 bn, ensuring financial stability for these ventures.
Conclusion
The major geopolitical events of the last few years, including the current tensions on our borders, has made one thing clear: India has to be self-sufficient in defence.
In an increasingly dangerous world, the best defence for India is to arm itself with equipment, ammunition, and technology, produced within the country. Being dependent on defence imports from any country can prove to be a disaster during a war.
Being self-sufficient in defence will also go a long way to mitigate the effect of sanctions placed upon the country during a conflict.
This makes the defence sector, potentially, the fastest-growing sector in India.
These stocks are looking good based on their fundamentals and growth runway but it’s important to be selective. Not all defence stocks are equally good.
Investors should evaluate the company’s fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.
Happy investing.
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