Rs 1,645-Cr order book, 21% RoCE: Is this defence stock near an earnings inflection?

Every company gets grouped under the same investment theme. Rising order books become enough to justify higher valuations. Investors begin to assume that every business in the sector will benefit equally, even though their capabilities, competitive advantages and profitability can vary widely.

India’s defence sector is gradually reaching that stage.

Centum Electronics is often viewed as another stock riding the country’s push towards defence indigenisation. On the surface, that description is accurate. The company designs, develops and manufactures high-reliability electronic systems for defence, aerospace, space, industrial and semiconductor applications. Its products are used in radar systems, electronic warfare platforms, satellites, missile programmes and industrial equipment where reliability is critical.

Centum Electronics 1-Year Share Price Chart

Beyond Contract Manufacturing: The BTS vs. EMS Business Moat

Unlike many listed electronics manufacturers, Centum does more than assemble products designed by its customers. The company operates through two business models. Its Electronics Manufacturing Services (EMS) business manufactures products for customers across semiconductor equipment, industrial electronics, defence exports and electrification. Its Build-to-Specification (BTS) business goes a step further by designing, engineering and manufacturing complete electronic subsystems.

This is important as design capabilities create stickier customer relationships than contract manufacturing alone. Once a supplier becomes part of a mission-critical defence programme, switching costs are high and projects often run for several years. Management said BTS orders typically have execution cycles of two to two-and-a-half years, providing better long-term visibility than conventional manufacturing orders.

Centum is also moving into more sophisticated applications. During FY26, it secured an Active Electronically Scanned Array (AESA) radar programme from Hindustan Aeronautics Limited (HAL) for the Utility Helicopter (UHM) platform, with a lifetime opportunity exceeding Rs 570 crore. It also won its second complete radar system order for a satellite and space debris tracking application, alongside continued traction in electronic warfare and aerospace systems.

Revenue Mix

These programmes require specialised engineering expertise rather than just manufacturing capability. As a result, Centum occupies a niche between a contract manufacturer and a defence technology company, with an increasing share of value coming from engineering, system design and proprietary technologies. That positioning could become an important competitive advantage as India’s electronics manufacturing ecosystem evolves.

Shedding Dead Weight: The Impact of Overseas Restructuring

Ironically, one of the biggest reasons for Centum’s improving investment case has little to do with new factories or fresh orders.

For several years, the company’s overseas subsidiaries distracted attention from an otherwise improving domestic business. Loss-making operations in Canada and Europe resulted in impairments, restructuring costs and accounting adjustments that masked the profitability of the Indian operations. Investors looking only at consolidated numbers often struggled to separate temporary restructuring pain from the underlying earnings trajectory.

During FY26, Canadian operations were classified as discontinued operations. Meanwhile, the French subsidiaries also moved into discontinued operations after restructuring proceedings commenced.

Subsequently, the French businesses entered judicial liquidation following the court-approved transfer of their operating businesses. Management has indicated that it does not expect any meaningful recovery from these assets but also does not anticipate further major exceptional losses flowing through the consolidated accounts.

The practical implication is straightforward. Investors can increasingly judge Centum based on the performance of its growing Indian electronics business rather than legacy overseas issues.

That may ultimately prove to be the most important change of all.

Deconstructing the ₹1,645 Crore Order Book

Order books have become the favourite metric for defence companies. Every quarter brings another announcement, another large contract and another reason for investors to get excited. The trouble is that an order book says very little about the quality of the business behind it.

Centum’s latest numbers deserve attention for a different reason.

The company ended FY26 with a standalone order book of Rs 1,645 crore, up 23% over the previous year. But the bigger change is in where that growth is coming from. Defence remains the anchor, yet the company is steadily building businesses in semiconductor equipment, industrial electronics and electrification. Management continues to target standalone revenue growth of 25% to 30% over the medium term, even after drawing a line under its overseas operations.

The mix is changing as well. The higher-value Build-to-Specification business grew 37% during FY26, driven by radar systems, space payloads and missile programmes. The Electronics Manufacturing Services business was not left behind either, reporting 21% growth on the back of semiconductor equipment, industrial electronics and defence exports.

More than 80 new products were introduced during FY26, while investments continued in manufacturing capacity, automation and engineering capabilities. The company plans to spend Rs 40-45 crore in FY27, with almost half directed towards strengthening the BTS business.

That perhaps explains why management has resisted making flashy promises. Instead, it has stuck to a medium-term growth target of 25% to 30%. In a sector where expectations often run ahead of reality, that restraint may be worth paying attention to.

Why margins could continue to improve

Revenue growth has attracted much of the market’s attention. Margin expansion may ultimately prove to be the bigger story.

Unlike a conventional contract manufacturer, Centum operates two businesses with very different economics. Management estimates that the BTS segment generates EBITDA margins of around 20%, while the EMS business typically earns margins of around 9% to 10%. As the share of BTS gradually increases, the overall profitability of the business has room to improve.

That does not mean margins will rise in a straight line. The EMS business operates largely on cost-plus contracts where pricing periodically resets, limiting the scope for sustained margin expansion. However, higher operating leverage, a richer mix of engineering-led programmes and continued scaling of the BTS business should support gradual improvement over time.

Management has guided towards EBITDA margins of 13% to 15% over the next few years, compared with 12.4% achieved by the standalone business during FY26. While the improvement may appear modest, even small increases in margins can have a meaningful impact on profitability when supported by 25% plus revenue growth.

Growth hasn’t come at the cost of financial discipline

One of the less discussed aspects of Centum’s transformation has been the steady improvement in its financial position.

As the overseas restructuring nears completion, attention is gradually shifting from exceptional items to the underlying economics of the business. Those economics are beginning to improve. Adjusted net working capital days declined from 159 in FY25 to 142 in FY26, borrowings remained modest at 0.28x debt-to-equity despite continued investments, and adjusted Return on Capital Employed (RoCE) improved to over 21%. Growth, in other words, is beginning to look more capital-efficient than balance-sheet intensive.

Company financials (FY23-26)

Importantly, future investments are being directed towards areas that could strengthen the company’s competitive positioning rather than simply adding manufacturing capacity. Spending on engineering capabilities, systems integration and product development should allow Centum to move further up the electronics value chain.

For investors, that distinction matters because businesses that create intellectual property generally enjoy stronger pricing power and higher returns than those competing only on manufacturing costs.

Has the market already priced in the good news?

The market has clearly recognised that Centum is becoming a stronger business.

The stock now trades at a valuation that reflects high expectations for sustained growth and improving profitability. That leaves relatively little room for operational disappointments.

Whether those valuations can be justified will depend less on new defence announcements and more on management’s ability to consistently deliver the targets it has outlined.

Sustaining 25% to 30% revenue growth, improving margins towards the guided range and maintaining healthy returns on capital will become increasingly important as the business grows larger.

The market has rewarded the promise of transformation. It will now expect evidence of consistent delivery.

What could go wrong?

Despite the improving outlook, investors should remain aware of several risks.

Defence programmes often involve long approval cycles, meaning revenue recognition can be delayed even after orders are secured. The BTS business also depends on successful execution of complex engineering programmes, where delays can affect profitability.

Supply-chain constraints remain another challenge. Management has already highlighted longer lead times for certain electronic components and raw materials, although it believes procurement strategies have helped mitigate much of the impact.

Finally, valuation itself represents a risk. Much of the optimism surrounding India’s defence manufacturing story has already been reflected across several listed companies. Investors should therefore distinguish between improving businesses and fully priced stocks.

The verdict

When an entire sector becomes fashionable, investors often stop looking beneath the surface.

Centum Electronics deserves a closer look precisely because its investment case extends beyond India’s defence spending story. The company has emerged from a difficult phase of overseas restructuring with a sharper strategic focus, a healthier standalone business and growing exposure to higher-value engineering programmes.

The next phase of its journey will depend on whether it can consistently convert those advantages into stronger margins, higher returns and sustained earnings growth.

That is ultimately the question investors should be asking. Not whether Centum is a defence company, but whether it is becoming a better business.

Disclaimer:

Note: We have relied on data from www.Screener.in 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. 

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. 

Manvi Aggarwal has been tracking the stock markets for nearly two decades. She spent about eight years as a financial analyst at a value-style fund, managing money for international investors. That’s where she honed her expertise in deep-dive research, looking beyond the obvious to spot value where others didn’t. Now, she brings that same sharp eye to uncovering overlooked and misunderstood investment opportunities in Indian equities. As a columnist for LiveMint and Equitymaster, she breaks down complex financial trends into actionable insights for investors.

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