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

Tensions in West Asia is expected to support sustained demand for defence equipment such as missiles, air-defence systems, surveillance technologies, and electronic warfare solutions, believes MOFSL

Escalating geopolitical tensions in West Asia are likely to reshape global defence spending priorities, with nations increasingly focusing on military preparedness and security infrastructure. This evolving landscape is expected to support sustained demand for defence equipment such as missiles, air-defence systems, surveillance technologies, and electronic warfare solutions. With the Middle East accounting for nearly 26 per cent of global arms imports in FY25, according to industry estimates, heightened regional instability could further expand procurement activity, creating new opportunities for defence manufacturers worldwide. 

Against this backdrop, India’s defence ecosystem appears well-positioned to capture incremental opportunities. The country has steadily strengthened its domestic manufacturing capabilities in recent years, supported by policy initiatives aimed at boosting indigenization. A notable indicator of this progress is the decline in India’s arms imports between 2016-20 and 2021-25, reflecting a growing ability to design and produce weapons domestically.  

 

Simultaneously, the country has begun emerging as a credible exporter of defence equipment, ranking among the top 25 global arms exporters in 2025. Defence exports reached ₹23,600 crore in FY25 and are projected to rise further in the coming years, with policymakers targeting nearly ₹50,000 crore in exports by FY30. 

Domestic policy support remains a key growth driver for the sector. The Union Budget has increased defence capital expenditure by 18 per cent year-on-year (Y-o-Y) to ₹2.2 trillion for FY27, providing financial visibility for a large procurement pipeline. So far in FY26, approvals for defence acquisitions worth over ₹7 trillion have been granted across multiple platforms and systems. These approvals typically translate into tenders and contracts over the next two to three years, ensuring a steady order pipeline for defence manufacturers. 

Structural reforms are also reshaping the procurement framework. The updated Defence Acquisition Procedure (DAP) 2026 places greater emphasis on “Owned by India” technologies, increases indigenous content requirements, and simplifies procurement categories to accelerate acquisition timelines. Additional measures to support startups, MSMEs, and innovation programs are expected to broaden the industrial base and reduce development risks for domestic players. However, near-term challenges remain as India continues to rely on imported subsystems for several advanced defence platforms, particularly sensors, radars, and missile components. Prolonged geopolitical disruptions could potentially affect supply chains and execution timelines for certain programs. 

Overall, the sector’s medium-term outlook remains constructive. Rising global defence spending, stronger domestic procurement pipelines, and policy-driven indigenization are likely to create sustained growth opportunities. As India deepens technological capabilities and expands export engagement with friendly nations, the domestic defence industry is gradually positioning itself as a more prominent player in the global military supply chain.  READ | Iran war impact: Emkay sees Nifty at 21,000; lists top 3 stocks to buy now

Bharat Electronics: Target – ₹520

Supported by a robust ₹73,000 crore order book and sustained inflows, Bharat Electronics remains well placed to benefit from large platform programs across the Army, Navy, and Air Force. A strong addressable market underpins expectations of sustained revenue growth exceeding 15 per cent over the coming years. Strong execution during Q3FY26 drove revenues and margins above expectations, aided by disciplined cost control and operating leverage.  

Effective supply-chain management has insulated the company from semiconductor shortages and commodity volatility, while higher indigenisation levels continue to support better-than-expected profitability. Looking ahead, Bharat Electronics is positioned to capitalize on sizable orders, including QRSAM, Akash-NG, next-generation corvettes, and base programs. Improved margins and healthy execution underpin management’s guidance, with revenue and profit after tax (PAT) expected to grow at 18 per cent and 16 per cent compound annual growth rate (CAGR) over FY25-28.

Bharat Dynamics: Target – ₹1,800

Bharat Dynamics Limited (BDL) is a critical pillar of India’s defense infrastructure, acting as the sole manufacturer of some of the country’s most sophisticated weapon systems. BDL enjoys a virtual monopoly as the prime production agency for guided missile systems and underwater weapons (torpedoes) developed by the DRDO. As of early 2026, BDL maintains a massive order book estimated at ₹25,500 crore, providing revenue visibility for the next 3-4 years.  

The company is aggressively pursuing "Deep Indigenisation," moving beyond mere assembly to mastering critical subsystems like seekers and guidance electronics. Under the government’s target of ₹50,000 crore in defense exports by 2029, BDL is emerging as a global player. There is significant international interest from friendly nations in Africa, the Middle East, and Southeast Asia. To meet its record order book, BDL is undertaking a cumulative capex of ₹2,500 - ₹3,000 crore over the next few years. This includes upgrading its manufacturing facilities with Industry 4.0, robotics, and AI-based technologies.  (Disclaimer: This article is by Motilal Oswal Financial Services Research. Views expressed are their own.)