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Valuation turning reasonable

Bharat Dynamics delivered strong 30% YoY growth in execution in 1QFY26 on a strong order book and the easing of supply chain issues as compared to last year. EBITDA margins were negative on account of negative operating leverage in a seasonally weak quarter. EBITDA loss, though, declined YoY. PAT performance was ahead of the consensus estimates. With a strong order book of nearly INR233b, we expect execution to scale up further in the coming quarters, particularly from Akash, Astra Mk1, MRSAM and armament projects. We expect BDL to benefit from a strong prospect pipeline of nearly INR500b and an emergency procurement program. We had initiated coverage on BDL in Jul’25 with Neutral recommendation due to high valuations of 52x/38x FY27E/FY28E EPS then. Since then, the stock has come down by 25% and is now trading at reasonable valuations of 39x/29x FY27E/FY28E EPS. We maintain our estimates and expect execution and margins to scale up in the coming quarters. We, thus, upgrade the stock to BUY from Neutral with an unchanged TP of INR1,900, based on 42x Sep’27E EPS.

Strong execution, weak margins

Revenue was broadly in line with consensus at INR2.5b, up 30% YoY. Gross margin contracted 700bp YoY to 76.1%. Absolute EBITDA loss of INR504m was 10% better than consensus. EBITDA margin improved to -18.3% in 1QFY26 from -27.4% in 1QFY25. Historically, BDL has recorded negative EBITDA in 1Q. PAT increased 154% YoY to INR183m, which was 8% above consensus of INR170m, aided by a lower tax rate of 20.7% in 1QFY26 vs. 35.8% in 1QFY25

Strong TAM and emergency procurement to enhance revenue visibility

We expect BDL to benefit from a total addressable market size of ~INR500b and an emergency procurement program. BDL can participate in various missile procurement programs for new naval, airborne, and army platforms, such as Project 75I Submarines, LCA Tejas Mk1A, Su30-Mk1, LCH Prachand, ALH Dhruv, QRSAM, MRSAM, NAG, and VSHORAD, along with the emergency procurement programs. From the recent DAC approval of INR670b, BDL can also benefit from acquisition plans for modernization, covering maintenance of the S-400 air defense system, BrahMos and other missiles. Further, DAC has given a nod for the INR19.8b fast-tracked counter-terror acquisition program, where the Army will procure systems like VSHORADS, loitering munitions, and drone detection solutions from Indian firms – areas where BDL could participate. The INR540b capital acquisition approvals given earlier in Mar’25 include Varunastra torpedoes, directly boosting BDL’s order book, while a pending INR20b-30b order for Invar ATGMs for T-90 tanks would further strengthen revenue visibility. Under emergency procurement too, we expect BDL to target order wins worth INR20-30b.

Margin improvement through self-reliance

BDL’s ongoing initiatives are strategically aligned to enhance profitability and improve margins. The establishment of its integrated radio frequency (RF) seeker facility at its Kanchanbagh Unit enables in-house production and testing of RF seekers, reducing dependence on costly imports and strengthening value addition within the company. At the same time, its capacity expansion for manufacturing surface-to-air missiles (SAMs), next-generation missiles, VSHORAD rockets, and propellants for anti-tank guided missiles (ATGMs) allows BDL to capture higher volumes and achieve better economies of scale. Over time, the company has also significantly lowered the share of imported raw materials and advanced indigenization efforts, with several platforms now achieving 80-90% local content. This combination of import substitution, higher in-house manufacturing, and scale efficiencies is expected to reduce input costs, improve supply chain control, and ultimately support sustained margin expansion.

Recent global announcement to support export growth

BDL is well placed to benefit from the wave of global developments aimed at boosting defense trade. NATO’s recent decision to raise member nations’ defense spending to 5 % of GDP by CY35 is expected to open up significant opportunities for suppliers that can deliver reliable and cost-effective solutions. This comes at a time when India’s defense exports have already hit a record INR236b in FY25, up 12% YoY, and are expected to double in the next 2-3 years. Among its peers, BDL has been much faster in grabbing the export opportunities, with its export revenue surging from INR1.6b in FY24 to INR12b in FY25. BDL has already secured export contracts from several allied nations, and by aligning its products and capabilities with the needs of NATO countries and other global buyers, BDL can tap into this rising demand.

Financial outlook

We maintain our estimates and expect a CAGR of 35%/64% in revenue/EBITDA over FY25-28, primarily driven by a sharp scale-up in execution due to moderating supply chain issues. We expect EBITDA margin to remain strong at 23.8%/24.7%/25.5% in FY26/FY27/FY28, fueled by the various indigenization efforts taken by the company and lower provisions. With an estimated annual capex of INR2.0b/INR2.5b/INR3.0b in FY26/FY27/FY28 and comfortable working capital, we expect a 51% CAGR in PAT over FY25-28. With improving revenue and stable margins, we expect its RoE/RoCE to remain comfortable, reaching 25.2%/25.6% by FY28.

Valuation and view

The stock currently trades at 39.3x/28.6x P/E on FY26/FY27/FY28 estimates. We maintain our estimates and expect execution and margins to scale up in the coming quarters. The stock has corrected 25% since we initiated coverage in Jul’25. We thus upgrade the stock to BUY from Neutral with an unchanged TP of INR1,900, based on 42x P/E Sep’27E EPS.

Key risks and concerns

Key risks for the company include a decline or reprioritization of the Indian defense budget, termination of existing contracts or failure to succeed in tendering projects, changes in procurement rules and regulations of the MoD and the government, and supply-chain-related issues.

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