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Execution delays weigh on revenue, but margin strength drives earnings resilience

Our defence coverage universe reported aggregate Q4FY26 revenue of INR 2,66,728 Mn, broadly flat YoY (-0.8%) and 3.1% below estimate, with the shortfall concentrated in BDL, DCX Systems and Zen Technologies on account of programme delivery timing variability. Despite the revenue miss, EBITDA of INR 86,828 Mn exceeded estimate by ~1.0%, with aggregate EBITDA margin of 32.6% outperforming our estimate by 130 bps. PAT of INR 69,355 Mn beat estimate by ~3.0% and grew 2.5% YoY, even as EBITDA contracted 3.0% YoY, a divergence consistent with PAT-level support from nonoperating income. Pronounced sequential improvement (revenue +58.9%, EBITDA +97.5%, PAT +83.9% QoQ) reflects characteristic fiscal year-end delivery acceleration.

DPSUs: BHE and HNAL anchor execution; BDL delivers a material programme-timing miss

Government defence companies reported aggregate revenue of INR 2,46,555 Mn, marginally above estimate, as strong execution at BHE (+9.2% vs estimate; +11.7% YoY) and HNAL (+6.4% vs estimate; +1.8% YoY) offset a significant shortfall at BDL, the revenue of which (INR 4,886 Mn) was 77.4% below estimate and 72.9% below Q4FY25. EBITDA margin of 32.8% beat estimate by 70 bps, though contracted 128 bps YoY. PAT grew 2.5% YoY to INR 65,356 Mn, with margin expanding 64 bps YoY to 26.5%, underscoring the balance sheet strength and earnings compounding inherent in the DPSU segment.

Private players: Revenue miss masks structural margin improvement

Private defence companies reported revenue of INR 20,173 Mn, 30.1% below estimate and 9.8% lower YoY. The shortfall is largely attributable to DCX Systems (INR 2,073 Mn vs est. INR 6,050 Mn) and Zen Technologies (INR 1,781 Mn vs est. INR 4,875 Mn). EBITDA margin of 29.1% materially exceeded our estimate of 23.7% by 540 bps and expanded 472 bps YoY, reflecting a favourable execution mix within the delivered revenue base. EBITDA grew 7.7% YoY and PAT grew 2.3% YoY to INR 3,999 Mn. We believe that the revenue shortfall is because of timing differential in order-to-execution conversion, not a demand-side signal and the deferred deliveries are expected to reflect in subsequent quarters.

Our View: The quarter's central message is one of earnings quality holding despite top-line stagnation – aggregate revenue was flat YoY (-0.8%) and missed estimate by 3.1%, yet aggregate EBITDA and PAT beat estimate. The DPSU segment's execution – anchored by BHE and HNAL – and the private sector's structural margin improvement collectively support our positive stance on Indian defence as a multiyear earnings compounding theme.

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