Defence on structural upcycle; Kotak starts coverage on HAL, Mazagon Dock

Kotak Institutional Equities said that defence companies are well-positioned to benefit from rising geopolitical tensions, accelerating modernisation programmes and an expanding export opportunity.

Defence stocks: Kotak Institutional Equities has initiated coverage on India's defence sector, saying it is on a multi-year structural upcycle. It said a sharp rise in Acceptance of Necessity (AoN) approvals, increasing push toward indigenisation and higher defence exports will drive long-term growth for the sector.

 

The brokerage forecasts defence capex to grow at 11 per cent CAGR over FY2026-30E, reaching ₹2.8 trillion, as "moderating pension growth frees up fiscal room and post-Operation Sindoor geopolitical imperatives accelerate modernisation".

 

Analysts said that defence companies are well-positioned to benefit from rising geopolitical tensions, accelerating modernisation programmes and an expanding export opportunity (₹384 billion in FY2026, targeting ₹500 billion by FY2029).

 

 

Over the medium term, the brokerage said that "companies with large order books, proven execution and diversified product portfolios will be winners."

 

India's defence exports 

 

Kotak noted that India's defence exports have increased nearly 50 times over the past decade, from ₹7 billion in 2014 to ₹384 billion in FY2026 and are expected to reach ₹500 billion by FY2029. 

 

"The next key target is the ₹500 billion of exports by FY2029, key factors driving to this target are India's cost advantage, rising global interest in indigenous platforms and strategic deepening of defence diplomacy," the brokerage said. 

India's defence exports

 

Drones: The new frontier

 

The brokerage also sees drones emerging as a major growth opportunity. It said that drones are fundamentally transforming warfare economics, with the global military drone market at $30 billion (CY2024) expected to reach $75 billion by 2029, growing at a 20 per cent CAGR.

 

"India's current drone spend is modest at around $250-300 million per year," the brokerage said, while estimating that India will spend $25-30 billion on drones and $4-5 billion on counter-drone systems over the next decade. 

  Defence companies valuation 

The brokerage added that Indian defence companies trade at around a 50 per cent valuation premium over global peers, factoring in faster projected growth. During FY2021-26, Indian defense manufacturers delivered around 25 per cent revenue CAGR with Ebitda margins expanding approx. 500 bps to 25 per cent.

 

However, when adjusted for lower research and development spend, the margin advantage versus global peers narrows from 800 bps to 450 bps, the brokerage said.

 

The brokerage said that the current valuations leave limited room for further upside despite favourable long-term prospects as it recommended 'Add' on Hindustan Aeronautics; 'Sell' on Mazagon Dock Shipbuilders and Solar Industries, assigning a fair value of ₹4,810, ₹1,950, and 10,300, respectively. 

 

The brokerage has maintained 'Reduce' rating on Bharat Electronics for a target price of ₹400 and 'Sell' rating on Cochin Shipyard for a target of ₹830.  =========================================== 

Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.