Motilal Oswal sector of the week: Defence; check top bets, target here

According to Motilal Oswal, defence electronics continues to see long-term demand for radars, avionics, communication systems and electronic warfare solutions

India’s defence sector is entering a phase of sustained momentum, supported by a confluence of policy support, rising domestic demand and expanding export opportunities. Recent developments, including fresh approvals for defence acquisitions, emergency procurement programs, a clearer technology and production roadmap, and expectations of higher budgetary allocations, have significantly strengthened order inflow visibility. As a result, sector-wide concerns around demand continuity have eased, reinforcing confidence in medium-term growth prospects.

 

One of the key structural drivers is the steady rise in indigenisation. The share of domestic procurement has increased sharply from pre-pandemic levels of about 54 per cent to nearly 75 per cent in the FY26 budget, with as much as 92 per cent of total contracts in FY25 awarded to domestic players. This shift is not only boosting revenue visibility but is also structurally improving margins by reducing import dependence, lowering input costs and improving control over design and supply chains. While a few manufacturing-heavy players may see modest margin moderation, the broader sector continues to witness margin resilience alongside strong revenue growth.

 

The sector’s opportunity pipeline remains robust across platforms. Defence electronics continues to see long-term demand for radars, avionics, communication systems and electronic warfare solutions. Missile and ammunition segments are witnessing traction from air-defence systems, tactical missiles, precision-strike weapons and guided rocket programs. The aircraft segment is focused on the execution of large indigenous fighter programs, while the shipbuilding space is preparing for a heavy naval pipeline.

 

Exports are emerging as a powerful long-term growth lever. India’s defence exports now span missiles, rockets, artillery guns, helicopters, aircraft components, naval vessels and protective equipment. Export opportunities are expanding as several global regions raise defence spending, especially in line with NATO commitments. With both public and private players actively engaging international clients, India’s position in the global arms export market continues to strengthen.

 

On the capacity front, the industry is executing a broad-based capex cycle. Aircraft manufacturers are scaling assembly lines, electronics players are upgrading selective facilities, missile companies are investing in propulsion and composites infrastructure, while shipyards are undertaking the largest expansions through new dry docks, floating docks and greenfield projects. This multi-year buildout aligns well with long-term order visibility.

 

Emergency procurement has also added incremental momentum, with recent orders spanning drones, counter-drone systems, protective gear, vehicles, air-defence systems, missiles and unmanned aerial vehicles. Together, rising domestic allocations, export traction, capacity expansion and deeper indigenisation position India’s defence sector for durable, multi-year growth, making it one of the most structurally compelling industrial segments in the current cycle.

Bharat Electronics (BEL) – TP: ₹500

Bharat Electronics continues to reinforce its leadership in India’s defence electronics space, supported by strong execution and a resilient order pipeline. In 2QFY26, the company reported a robust beat across metrics driven by superior cost control and project execution. The order book stood healthy at ₹746b, with inflows more than doubling YoY. Management reaffirmed its long-term export strategy, targeting an increase from 3-4 per cent of turnover to 5 per cent over the next 2-3 years, eventually reaching 10 per cent of total revenues, led by key programs such as QRSAM, Project Kusha, and next-generation corvettes. Under the TPCR 2025 roadmap, BEL is well-positioned to capture opportunities across the Army, Navy, and Air Force in areas such as radars, electronic warfare systems, communication networks, and counter-drone technologies. With expanding system integration capabilities, a strong export order book, and visibility from large defence projects, we estimate steady growth ahead. With projected sales/Ebitda/ PAT CAGR of about 18 per cent/17 per cent/17 per cent over FY25–28, BEL stands out as a key beneficiary of India’s defence modernisation drive.

Bharat Dynamics (BDL) – TP: ₹2,000

Bharat Dynamics’s (BDL) healthy order book of nearly ₹235 billion provides multi-year revenue visibility, underpinned by large ongoing missile programs and fresh emergency procurement orders. It delivered a sharp execution recovery in the latest quarter as supply-chain constraints eased, driving a strong jump in revenues and profitability. While margins were tempered by an unfavourable project mix and higher bought-out content, operating performance remained robust, supported by rising scale and better cost absorption. Growth is also being reinforced by a strategic push to raise the share of exports to 25 per cent by FY29-30 (excluding FY25; below 10 per cent of total revenue) through a widening international product portfolio across missiles, underwater systems and avionics. Structurally, deeper indigenisation, sustained R&D investments and targeted capacity expansion in propulsion, composites and advanced manufacturing are strengthening long-term competitiveness. Recent defence acquisition approvals across missile and undersea warfare platforms further enhance medium-term growth visibility, supported by a diversified and expanding order pipeline. We expect the company to grow revenue/Ebitda/PAT at 35 per cent/64 per cent/51 per cent over FY25-28.  Disclaimer: This article is by Motilal Oswal Financial Services Research Desk. Views expressed are their own.