Strong order book, investment outlook likely to support defence stocks

Approvals have surpassed FY25 levels of Rs 2.2 trillion. The share of domestic procurement has risen from 54 per cent in FY19 to 92 per cent in FY25

The Defence Acquisition Council (DAC) has recently approved procurement proposals worth ₹79,000 crore across three services and it has cleared AoN (Acceptance of Necessity) of ₹3.3 trillion in financial year 2026 (FY26). This is part of the indigenisation policy and provides strong multi-year order visibility for defence players. 

 

Approvals have surpassed the FY25 levels of ₹2.2 trillion.

 

The share of domestic procurement has risen from 54 per cent in FY19 to 92 per cent in FY25. This provides an opportunity for defence players. There is a focus on faster acquisition and procurement processes. The Ministry of Defence or MoD is working to reduce testing.

 

Major approvals include quick reaction surface to air missile or QRSAM and landing platform docks worth ₹30,000 crore and ₹28,000 crore, respectively.

 

The Q3 saw AoNs worth ₹1.6 trillion, including approvals for the Nag Missile System Mk-II, landing platform docks, advanced lightweight torpedoes, Astra Mk-II missiles, high frequency software defined radios (Manpack), loiter munition, guided rocket ammunition for the Pinaka and mission simulators.

 

AoN approvals such as long range guided rocket ammunition for Pinaka benefits Solar Industries (already executing a ₹6,000 crore order for Pinaka Mk-II). And AoN for Astra Mk-II missile should benefit Bharat Dynamics (BDL) and Bharat Electronics (BEL) while other approvals provide opportunities for other companies. Earnings growth is expected to trend up in H2FY26. Near-term risks do include execution delays and global supply dependencies. 

 

GE has commenced F-404 engine deliveries for Tejas, with five engines delivered to date and two more expected in January 2026.

 

The improving supply outlook supports a ramp-up in execution, given procurement of additional 97 LCA Tejas MkA1 aircraft at ₹62,000 crore for HAL. These aircraft will feature 64 per cent indigenous content and the deliveries start in FY28 for a six-year period. HAL has an order book of ₹2.5 trillion including ₹62,800 crore order for 156 LCH Prachand Helicopters (deliveries from FY29) along with prospects exceeding ₹1.0 trillion for the next two years.

 

The sector should report low double digit revenue growth in Q3FY26, given big order books and good execution. The winners could be Solar Industries, Paras Defence, BEML and BEL. The Q4FY26 may see a big jump. For PSUs which hold big order books, the focus is on execution, given book-to-bill ratios of 4 times. 

 

In FY26, the Ministry of Defence (MoD) was allocated ₹6.81 trillion, marking a strong year-on-year increase from ₹6.22 trillion in FY25. The FY27 Budget is expected to further boost defence allocation given security requirements, and lessons from Operation Sindoor. Overall, sector analysts expect double digit increases in defence capex for next few years. 

 

HAL, BEL, and BDL will be key beneficiaries, while electronics companies in the defence space, such as BEL, Astra Microwave, and Data Patterns, will have contributions across platforms.

 

BEL is an integrator, and Astra Microwave and Data Patterns are key subsystem suppliers which may become Tier-1 suppliers as they move up value chains.

 

Naval capex has also risen with warship procurement at ₹24,400 crore in FY26 from ₹9,300 crore in FY18, rising to about 15 per cent of total defence capex.

 

New ships also have higher domestic content. Over 60 naval vessels are under construction and another 70-80 are planned, including Project 15B destroyers, 17A frigates, next-gen corvettes, and fleet support ships. The pipeline is over ₹2.3 trillion, and 75 per cent is reserved for domestic vendors. Shipyards such as Mazagon Dock (MDL), Cochin Shipyard (CSL), and Garden Reach Shipbuilders & Engineers (GRSE) enjoy multi-year revenue visibility.

 

AoNs were accorded under the Buy (IDMM or Indigenously Designed, Developed, and Manufactured) category which refers to procurement of products which have been indigenously designed, developed, and manufactured with a minimum of 50 per cent indigenous content (IC) on cost basis.

 

Investors must track conversion of AoN approvals into firm orders, especially large-ticket missile, air-defence and electronics programmes, increase in overall defence allocations and timelines for big programmes like Akash, QRSAM, etc. Big export order wins and government-to-government deals could also play a part in growth.