Defense Sector Update : Defense spending to remain in focus by Motilal Oswal Financial Services Ltd
The current conflict in the Middle East is likely to drive higher global defense spending as nations prioritize security and military preparedness. In this environment, India’s defense sector is well positioned to benefit from both rising domestic procurement and increasing export opportunities, supported by the government’s push for indigenization and a growing reputation in global arms markets. However, in the near term, we will also look out for supply chain constraints, particularly related to specialized components and imported subsystems, which could affect the execution timelines of certain defense platforms. We maintain our positive stance on BHE (CMP: INR458 | TP: INR520), HAL (CMP: INR3,989 | TP: INR5,500), BDL (CMP: INR1,336 | TP: INR1,800), and ASTM (CMP: INR1,008 | TP: INR1,150). We remain Neutral on Zen Technologies (CMP: INR1,443 | TP: INR1,400).
Scalating geopolitical tensions prompt higher defense spending
Escalating geopolitical tensions in the Middle East could drive a surge in global defense spending and demand for military equipment such as missiles, air-defense systems, surveillance technologies, and electronic warfare solutions. In FY25, the Middle East accounted for 26% of total global arms imports (Source: SIPRI) and this can increase further, thereby opening up opportunities for domestic defense companies to capture this market. Along with this, the earlier NATO directive to member nations to increase defense capex allocation and higher budgetary allocation for defense by Indian government bode well for increasing the TAM for domestic defense companies. We expect companies like Bharat Electronics, Bharat Dynamics, Solar Industries, Astra Microwave and Zen to benefit from a higher TAM.
Supply chain disruption can play out too
India is heavily reliant on Israel for critical defense components, with Israel accounting for nearly half of India's air defense and sensor imports. India’s purchases from Israel are concentrated in advanced components and platforms for missiles, loitering ammunition and precision strike weapons; also air defense systems and sensors for radars and optical systems. A prolonged Middle East conflict could impact the supply chain for critical components.
Increased defense capex support AoN approvals
The Union Budget has increased the capital outlay on defense by 18% YoY to INR2.2t in FY27BE. This increase is important as it provides the necessary funding visibility to support the large pipeline of AoN approvals cleared YTD in FY26. So far, AoNs worth over INR7t have been approved across multiple platforms and systems, creating a strong procurement pipeline for the domestic defense industry. These approvals typically translate into tenders, contract awards, and execution over the next 2-2.5 years, implying a steady flow of order inflows for defense manufacturers.
Strong prospect pipeline across platforms
Management commentary across key defense companies points to strong visibility for order finalization over the next 15-18 months, backed by large, named programs at advanced stages.
* BHE has highlighted near-term opportunities, including LCA Mk-1A systems (~INR24b), Shatrughat EW (~INR30b), next-gen corvettes (INR20-30b in FY26 and INR100-120b by 1HFY27), additional programs of ~INR20b, and expected QRSAM inflows (~INR300b).
* HNAL is expected to begin deliveries of Tejas Mk-1A and has secured orders such as Dornier-228 (~INR23b), Dhruv-NG (~INR18b), and ALH Mk-III (~INR29b).
* BDL is targeting ~INR200b of orders over the next 18 months from an ~INR500b pipeline, supported by advanced trials of Akash-NG and other missile systems.
* ASTM remains well positioned for QRSAM and EW-linked electronics opportunities (~INR250b long-term). ZEN expects an INR600m simulator order to lift its book from ~INR14.3b to ~INR20b, largely executable over 18 months.
* GRSE has emerged as L1 for next-generation corvettes (~INR330b) and sees progress on P-17 Bravo (~INR700b), landing platform dock (~INR350b), and mine counter-measure vessels (~INR320b).
* SOIL reported a strong defense order book of ~INR180b, supported by Pinaka and ammunition supplies from 4QFY26.
Inflows have been strong so far
Defense PSUs (DPSUs) have entered the final stretch of FY26 with strong YTD inflows, with BEL/HAL/BDL having secured capital contracts worth INR206b/INR694b/INR54b. Ordering for the private defense players has also improved in FY26. ASTM inflows for the defense segment have been steady over the years, with orders worth INR2.9b received in 3QFY26. ZEN tech inflows revived in 3QFY26, with orders worth INR6b received during the quarter, additional INR3.5b received in Jan’26, and a simulator order worth INR6b expected in FY26
Updated DAP 2026 to support Indian defense players
The government introduced an updated DAP to promote indigenization by shifting from ‘Made in India’ to ‘Owned by India’. The key reforms included 1) simplifying procurement categories (reducing them from five to four) to streamline decisionmaking and accelerate acquisition timelines; 2) strengthening indigenization, increasing the minimum indigenous content requirement in the ‘Buy (Indian-IDDM)’ category from 50% to 60%; 3) an ab-initio single vendor provision has been allowed in the Buy (IDDM) category for equipment with certain technology readiness levels (TRL); 4) promoting technology ownership by allowing India to retain critical design data, source code, and upgrade rights for defense platforms; 5) improving support for startups, MSMEs, and innovation programs like ‘Make’ and ‘iDEX’, including assured orders for successful prototypes and compensation for vendors clearing trials, which lowers development risk; 6) redefining the Fast Track Procedure with greater delegated powers to enable quicker procurement of emerging technologies
Valuations and recommendations
* BHE is currently trading at 46.9x/40.0x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR520, based on the 45x two-year forward earnings.
* HAL is currently trading at 26.2x/21.2x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR5,500, based on the average of DCF and 30x two-year forward earnings.
* BDL is currently trading at 42.5x/29.8x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR1,800, based on the 42x two-year forward earnings.
* AMPL is currently trading at 42.6x/33.4x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR1,150, based on the 38x two-year forward earnings.
* ZEN is currently trading at 39.1x/29.9x FY27E/FY28E EPS. We maintain our estimates and reiterate our Neutral rating on the stock with an unchanged TP of INR1,400, based on the 30x two-year forward earnings.
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