Analysts expect moderate increases in budget allocations for the defence sector as government continues to focus on modernisation and self-reliance. In terms of market reaction, experts believe the reaction will hinge on specific policy announcements and allocation details.
In the FY2024-2025 budget, the finance minister allocated Rs 6.22 lakh crore to the sector -- a 4.79 percent increase from previous year. Capital expenditure was Rs 1.72 lakh crore, with Rs 92,088 crore for operational readiness and Rs 1.41 lakh crore for defence pensions.
The budget also included Rs 6,500 crore for border roads, Rs 7,651 crore for coastal security, and Rs 518 crore for innovation through the iDEX scheme.
The capital outlay for defence, Prabhudas Lilladher’s Amit Anwani believes, is expected to grow by 7-8 percent in FY26, similar to previous years. "Assuming that the budget will be around Rs 1.9 lakh crore, the allocation might increase for mobility vehicles, Navy, and perhaps remain steady for aerospace," says Anwani.
On the sector, Anwani notes that the Ministry of Defence recently announced a Rs 21,700 crore work clearance, emphasising its commitment to reform and modernisation. The focus is on capability building in areas such as robotics, AI, training, and simulation, alongside fast-tracking key projects.
“All three services -- Army, Navy, and Air Force -- require significant modernisation, both in terms of equipment and manpower training,” he said adding that over the past three to four financial years, the government has prioritised localisation in defence manufacturing to achieve self-reliance, with a strong emphasis on technology transfer and indigenous production.
While Anwani is optimistic, Anil R, Senior Research Analyst at Geojit Financial Services, suggests that a lot of spending has not happened in the last nine months, so effectively, some carry forward would be there. "I don't think we will have a big increase, but if it happens, it's a good thing," he says.
Anil believes that the main problem now is that consumption is dipping, so the government's focus will be on improving consumption. Overall, he adds that the total budget allocated for the sector was around Rs 6.2 lakh crore, with capital expenditure amounting to Rs 1.72 lakh crore, i.e., about 25-28% of the total budget.
"Looking at the data from 2010 onwards, it's clear that the capital budget has consistently been in the range of 28-30% at most," he explained.
Focus on Self-Reliance and optimism for the Segment
In a recent report, analysts at PhillipCapital noted that the defence sector emerges as a critical growth opportunity, supported by modernisation programs, favourable government policies, and robust global demand.
"India ranked as the fourth-largest military spender, allocating $84 billion in 2023, accounting for 2.4% of its GDP. Despite this, approximately 35% of India’s defence needs are still met through imports, presenting a significant opportunity for import substitution," the report notes.
India’s defence exports have surged, growing at a 46 percent CAGR between FY17-24, with products like missiles, radars, and armoured vehicles exported to over 85 countries, it added.
"The government has been focusing on localising many things in defence over the past few financial years," Anwani highlighted. "They are focusing on the transfer of technology, like what we saw with GE engines, although challenges in execution persist."
He also believes that R&D investments and collaborations are critical to India’s defence ambitions. "For projects like the AMCA (Advanced Multi-role Combat Aircraft), the government has allocated significant funds for R&D. The government is exploring partnerships with global players like Saffron for engine development, moving beyond dependency on GE and Rolls-Royce," said Anwani.
Despite structural reforms, dependency on imports for critical components like engines and supply chain continues to be a challenge.
Impact on the Stock Market
Experts believe the market’s reaction will hinge on specific policy announcements and allocation details. For example, any positive developments on supply chain bottlenecks or technology transfer could trigger upward momentum.
Anil notes that the defence index has corrected by 30 percent, though it remains at a 26 percent premium on a 3-year basis. "The sector is rated neutral overall, with selective buy-calls on Bharat Electronics (PE of 42x for FY26) and Astral Microwave Products (PE of 45x for FY26). Astra Micro is valued higher than the sector average of 38X due to their niche positioning," he adds.
Anwani adds that key stocks to watch include Mazagaon Dockyard for shipbuilding, BEL for mobility vehicles, and Bharat Electronics for defence electronics and R&D capabilities. The private sector, including companies like Data Patterns and Zen Technologies, is also poised for growth, driven by government programs promoting public-private partnerships. India's defence capabilities are likely to improve, with a focus on intermediate products and defence electronics, paving the way for export opportunities.
“Valuations across the sector show that defence electronics, excluding Data Patterns, are generally valued between 40 to 45x, while OEMs like BEML and HAL are around 35x,” he adds.
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