Defence growth trajectory remains elevated, but execution holds the key

Rising defence orders and policy support point to strong growth for domestic manufacturers, but supply-chain gaps, lumpy spending and execution remain key risks.

The Defence Acquisition Council (DAC) has cleared Acceptance of Necessity (AoN) for procurement proposals worth Rs 1.1 trillion, with approximately 98 per cent of the value earmarked for domestic manufacture. This latest AoN takes the total DAC approvals in FY27 to over Rs 1.62 trillion and, since FY25, AoNs worth Rs 13 trillion have been cleared for the defence sector.

 

This trend of sustained defence spending leads to credible projections that budget allocations for the sector will continue to grow at double digits through the foreseeable future. In turn, that makes it likely that several listed companies with a defence focus will see revenue growth of over 20 per cent a year. However, given that defence spending is inherently lumpy, there could be a fair amount of volatility across the top line and delays must also be factored in.

 

A rundown of the AoNs indicates many beneficiaries. The latest Advanced Light Helicopter order could be worth Rs 25,000–30,000 crore, with BEL, HAL and BEML as the major beneficiaries. An order for vehicles used for detection, identification and marking of CBRN (chemical, biological, radioactive and nuclear)-contaminated areas will lead to orders coming to BEL, while an order for high-mobility, all-terrain vehicles for logistics will benefit BEML.

 

Godrej Precision will be a key player in providing the mechanical mine layer, an automated system for laying anti-tank mines. BEML will produce a tank-mounted mine-breaching system to clear minefields for trawl tanks. L&T will design the mobile Sarvatra Bridge System for crossing water obstacles.

 

BEL is to produce the Arudhra radar, a 4D phased-array radar for aerial surveillance. Bharat Forge is working on a marine gas turbine propulsion system for naval vessels. BEL, Astra Microwave and Data Patterns will be involved in developing the ground-based multi-purpose jammer electronic-warfare system to jam enemy systems. BEL will produce a system of RFID-based secure smart cards for access control.

 

In addition, there are likely to be several major orders placed soon. These include the P75I submarine programme (estimated at Rs 90,000 crore), quick reaction surface-to-air missile or QRSAM system (Rs 30,000 crore), and the next-generation corvette (NGC) programme (Rs 33,000 crore).

 

These orders could be awarded to Mazagon Dock (MDL), BEL and Garden Reach Shipbuilders & Engineers (GRSE), respectively. Bharat Dynamics (BDL) may supply missiles (Rs 10,000-12,000 crore) for the QRSAM programme, while BEL is looking at combat management systems (CMS) and radars.

 

In policy terms, the government has approved the transfer of DRDO-developed technologies of all conventional missile systems to the Indian defence industry for domestic production. It has also simplified defence export rules with reduced approvals, extended validity of open general export licence (OGEL) and expanded OGEL coverage from 41 countries to most global markets. This is part of a push to encourage exports. PSUs contributed Rs 1.3 trillion of India's Rs 1.8 trillion defence production in FY26, while exports jumped 151 per cent Y-o-Y.

 

HAL has $27 billion worth of outstanding orders and the ALH AoN will add about 13 per cent to the backlog. The company may see the easing of a key constraint as GE Aerospace delivered three additional F404 engines in August 2026, taking total Mk1A Tejas engine deliveries to 10. HAL has also signed partnerships with Adani Defence and other industry players to strengthen the ecosystem for the LCH Prachand. HAL is trading at a price-to-earnings, or P/E, ratio of around 33 on estimated FY27 earnings. If HAL can solve its supply-chain issues (a key monitorable), it would lead to an acceleration in Tejas and Sukhoi deliveries, with a mid-twenties jump in earnings and revenues.

 

BEL is a key player across the entire ecosystem. It has delivered 25 per cent execution growth despite margin pressure in Q1FY27. It has signed an MoU with Ananth Technologies to jointly develop R&D for missiles, radars, satellites and navigation.

 

Cochin Shipyard has delivered 'Mangrol', the third of eight anti-submarine warfare craft with 80 per cent indigenous content. BDL has an order book of Rs 22,600 crore of missile deliveries, albeit with high competitive intensity and margin pressures. Data Patterns is another company which is doing well and has a good pipeline, but it is highly valued.

 

Despite the ramp-up in domestic manufacturing, there are still major gaps in the ecosystem. Chips, sensors, laser weapons, special steels and other materials are all import-dependent. There is also a lack of IP across the ecosystem, which can only be addressed by more R&D. Execution will be key to companies making the most of the opportunities, but order books are bulging and the pipeline for future orders is robust.