India has notably one of the strongest military forces in the world and hence holds a position of significant strategic importance. No wonder the defence industry plays an important role in the country’s economy.
The Macro Tailwinds: Exports & Policy
The defence industry is poised for solid growth driven by rising national security concerns. The “Aatmanirbhar” push has ensured that domestic defence companies benefit from this surge in demand, thus propelling growth of companies in this sector.
Not just domestic demand, even exports have taken off as a result of this policy initiative. In fact, total exports have surged by over 34 times since 2014, to $2.76 bn in FY25.
While DPSUs (Defence Public Sector Undertakings) remain a vital pillar, the private sector has emerged as the primary engine of growth, contributing roughly $1.80 bn to the export total.
This 12% annual growth rate is not slowing down as mid-year data for FY26 shows that India has already secured Rs 9,131 cr in international orders, underscoring a deep-rooted structural shift in India’s capabilities.
And riding in this wave are two less known small cap defence stocks that have recorded industry beating profits in the last 5 years. Before we dig into the stocks, please note that both the stocks have been listed in the SME exchanges. Buying SME stocks comes with a significant warning: buyer beware. The requirement to trade in fixed lots creates a liquidity bottleneck, often leaving investors stranded when prices crash.
Additionally, the tiny equity base of these companies invites manipulation, fuelling ‘pump and dump’ schemes designed to trap retail capital. And lenient reporting standards frequently mask poor financial health, which the investors only come to know about when it’s too late.
#1 Krishna Defence & Allied Industries Ltd: Deep-Sea Tech for the Indian Navy
Incorporated in 1997, Krishna Defence and Allied Industries Ltd designs, develops, and manufactures a wide range of equipment for defence and security.
With a market cap of Rs 1,168 cr, develops indigenous solutions for import substitution in defence sector. It provides critical components to Indian Navy for its warships and develops special products for Indian Army.
Looking at the financials, for Krishna Defence & Allied Industries Ltd, we will be looking at standalone numbers to get data for a longer period, just to get a better perspective.
The sales of the company have grown at a compounded rate of an enviable 51% from Rs 25 cr in FY20 to Rs 194 cr in FY25. For H1Y26, sales of Rs 120 cr have been logged already.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) went from Rs 4 cr in FY20 to Rs 31 cr in FY25, which is a compounded growth of 51%. And for H1FY26, the EBITDA figure was Rs 22 cr.
Coming to the Net Profits, the company’s figures have jumped from less than Rs 1 cr in FY20 to Rs 22 cr in FY25, which is a compound growth of 96%. This is one of the highest when compared to peers from the industry as the current industry median is just 26%. So, the company is beating peers at profits by almost 4 times. Though it must be acknowledged that this growth has been achieved on a very small base.
For H1FY26, the company has recorded profits of Rs 16 cr already, hinting towards a stronger end to FY26.
The share price of Krishna Defence & Allied Industries Ltd was around Rs 85 when listed in April 2022 and as of closing on 24th December 2025, the price was Rs 783, which is a jump of 820% in less than 4 years.
Rs 1 Lakh invested in the stock at listing would have been Rs 9.2 Lakhs today.
Valuation Reality Check
At the current price of Rs 783, the stock is trading at a discount of over 30% from its all-time high price of Rs 1,130. Now whether this is a possible entry opportunity for those who missed the initial rally only time will tell.
The company’s share is trading at a current PE of 43x, and the industry median is 61x as on 25th December 2025.
According to the company’s latest investor presentation from November 2025, the company’s order book on closing of March 2025 was Rs 196 cr.
The company is working on new product development for the defence to indigenise the products which are currently being imported, Off set contract obligation and collaborate with Defence Research Agencies / Foreign agencies to develop and manufacture the products.
#2 CFF Fluid Control Ltd: Backing Indian Navy
Incorporated in 2012, CFF Fluid Control Ltd is in the business of manufacturing, overhaul, repairs, and maintenance of shipboard machinery, combat system, reference system, test facilities (pneumatic, hydraulic, electrical, electrical systems) for submarines and surface ships for Indian Navy.
With a market cap of Rs 1,144 cr, the company manufactures critical component systems and test facilities for submarines & surface ships for the Indian Navy and designs, develops mechanical equipment and systems for industries like Nuclear and Clean Energy.
The CFF Growth Engine
Coming to the financials, the sales of the company have grown at a compounded rate of 36% from Rs 32 cr in FY20 to Rs 146 cr in FY25. For H1Y26, sales of Rs 104 cr have been logged.
EBITDA went from Rs 5 cr to Rs 41 cr between FY20 and FY25, logging a compounded growth of about 52%. And for H1FY26, the EBITDA figure was Rs 29 cr.
As for the net profits, the company recorded a compounded growth of 77% from less than Rs 2 cr in FY20 to Rs 24 cr in FY25. For H1FY26, net profits of Rs 19 cr have been recorded.
The share price of CFF Fluid Control Ltd was around Rs 165 when listed in June 2023, and as of closing on 24th December 2025 the price was Rs 545, which is a jump of 230% in less than 3 years.
Rs 1 Lakh invested in the stock at listing would have been Rs 3.3 Lakhs today.
While the stock has tripled since listing, it is currently available at a 42% discount from its peak. Again only time will tell if this were to be a potentially attractive entry point for long-term investors tracking the navy’s indigenization cycle. The company’s stock is trading at a PE of 40x, while the industry median is 61x as of December 2025.
The promoter holding of the company has seen a drop from its March 2025 quarter ending figure of 73.3% to 68% as of the quarter ending September 2025.
The company’s order book was at Rs 540 crore as on 14th November 2025, as per the most recent investor presentation from December 2025.
The 2026 Verdict: Can Order Books Outrun SME Volatility?
India’s move toward “Aatmanirbhar Bharat” is turning its defense sector into a major economic force. While the bigger names in the industry grab all the headlines, smaller and lesser-known companies like Krishna Defence & Allied Industries and CFF Fluid Control are also proving they can lead the way. Both companies have shown profit growth that far exceeds the industry average.
However, being an “underdog” on the SME exchange has its own set of rules. Both the stocks are trading at good discounts from their all-time high prices, which might look like a good entry point. At the same time, investors must weigh these gains against risks like low liquidity and smaller equity bases.
The big question for 2026 is whether these two can use their strong order books to become the next generation of defense leaders. As the push for local manufacturing speeds up, these stocks are worth watching closely. Time will tell if they are just riding a wave or if they have the strength to be long-term winners.
Note: We have relied on data from www.Screener.in and www.trendlyne.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Disclaimer:
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Suhel Khan has been a passionate follower of the markets for over a decade. During this period, He was an integral part of a leading Equity Research organisation based in Mumbai as the Head of Sales & Marketing. Presently, he is spending most of his time dissecting the investments and strategies of the Super Investors of India.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
