Budget 2026: Markets eye 8-10% defence outlay hike but seek execution momentum, not just allocations

“The market expects improved visibility for the defence sector, with incremental allocations largely directed towards drones, arms and ammunition, defence electronics and indigenisation,” according to, Ankit Soni, AVP Fundamental Research, Mirae Asset ShareKhan.

• Defence sector expects 8–10% budget growth, focus on drones and electronics
• Delays in execution and order finalization challenge defense companies.
• Stocks like GRSE, HAL, and Bharat Dynamics seen as reasonably valued

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Markets expect the defence budget to rise 8-10%, with any increase beyond 10% seen as a positive surprise. Allocations are likely to favour drones, arms and ammunition, and defence electronics, reflecting operational priorities and indigenisation efforts.

Ahead of the Union Budget, expectations for the defence sector are more constructive than last year, with the market shifting focus from headline announcements to execution and order conversion.

Markets are looking for improved visibility on allocations, faster follow-through on Defence Acquisition Council (DAC) approvals, and clearer timelines for translating approvals into firm orders. While Budget Day can act as a short-term trigger for defence stocks, the broader narrative continues to be driven by indigenisation, modern warfare requirements, and export-led growth.

Key Trends

· Increased focus on drones, counter-UAV systems and unmanned platforms

· Sustained emphasis on missiles, air defence systems and long-range artillery

· Rising importance of defence electronics, including radars and electronic warfare

· Gradual improvement in defence exports amid higher global defence spending

· Expectations of more balanced allocations across the Army, Navy and Air Force

Key Challenges

· Slower conversion of approved capex and pipeline projects into confirmed orders

· Execution delays impacting near-term revenue visibility

· Supply-chain constraints in select import-dependent components

· Working-capital pressures and elongated receivable cycles for defence PSUs

Last Budget Highlights

· Rs 6.81 lakh crore allocated to the Ministry of Defence, a 9.53% increase over the previous financial year

· Rs 1.80 lakh crore earmarked under the Armed Forces Capital Budget, with modernisation as a key focus area

· Rs 1.12 lakh crore allocated specifically for procurement from domestic defence industries

· 12% increase in the Defence R&D budget

· 43% jump in the Capital Budget of the Indian Coast Guard, and Rs 7,146 crore allocated to the Border Roads Organisation under the capital head

Industry Expectations This Budget

· Defence budget growth of around 8-10%, with anything above 10% seen as a positive surprise

· Higher allocations for drones, arms and ammunition, and defence electronics

· Improved balance in spending across services, with incremental support for the Army

· Continued focus on long-tenure contracts and platform-based programmes

· Better clarity on execution schedules and order finalisation

“The market expects improved visibility for the defence sector, with incremental allocations largely directed towards drones, arms and ammunition, defence electronics and indigenisation,” according to, Ankit Soni, AVP Fundamental Research, Mirae Asset ShareKhan adding that while FY26 defence capex approvals are around Rs 3.3 lakh crore, “the key challenge remains execution, with delays in order finalisation pushing timelines and affecting near-term revenue visibility.”

Amit Anwani, VP - Lead Analyst - Capital Goods, Industrials and Defence at PL Capital, says expectations this year are anchored more in follow-through than fresh announcements. “The market believes that outcomes from the Defence Acquisition Council will now start translating into action, with a healthier RFI and RFP pipeline converting into actual orders,” he says, highlighting counter-UAV systems, missile defence, submarines, helicopters, and mobility platforms as key areas of focus.

Sector Outlook

The outlook for the defence sector remains constructive but selective. Defence stocks have already delivered strong returns, though valuations have corrected 15–20% from recent highs as execution assumptions have moderated. Analysts note that a very large positive surprise is unlikely given competing fiscal priorities, but a stable-to-positive allocation should support sentiment. From a valuation perspective, Anwani noted that the defence sector has corrected from the euphoric levels seen a few months ago.

“Earlier expectations assumed rapid execution of all order books, but execution is naturally staggered over time. After the correction, valuations are more reasonable, but selectivity is important. Companies like GRSE look comfortable at around 16-17x EV on FY28 estimates, HAL appears reasonably valued at around 29x FY28 earnings given its visibility, and Bharat Dynamics remains attractive assuming large missile orders materialise. These are areas where valuation and execution visibility are better aligned,” he said.

With elevated order books, near-peak execution levels and long-term visibility from defence modernisation, indigenisation and export growth, downside risks appear limited, even as stocks remain sensitive to Budget Day outcomes.

“As far as Budget Day is concerned, the sector will certainly remain in focus, but a very large positive surprise is unlikely. The government also has competing priorities, including support for exports and broader economic considerations. A defence budget growth of around 8-10 percent would be seen as a comfortable outcome by the market,” Anwani said.

Stocks in focus: GRSE, BDL, BEL, Paras Defence

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