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DAC approval positive for the sector

The Defence Acquisition Council (DAC) has approved capital acquisition proposals worth INR790b for the Indian Army, Navy, and Air Force. Earlier during the last few months, too, several developments have happened in the defence sector,such as the DAC approval of INR670b in Aug’25, followed by a focus on the defence Procurement Manual (DPM) 2025 and the TPCR roadmap for technology and capability building within the country. This suggests a continuous focus of the government on the defence sector. With the existing emergency procurement pipeline and expectations of higher budgetary allocation for defence capex, we expect the sector to continue to benefit from a larger TAM and finalization of orders over the next few years. Thus, we believe that defence companies are likely to benefit from 1) improved ordering in the sector, 2) strong order books, 3) stability in margins as supply chain issues are largely over and indigenization levels have increased, and 4) the ability to capitalize on export opportunities. We maintain our positive stance on BHE (CMP: INR422, TP: INR490, based on 45x Sep’27 estimates), HAL (CMP: INR4,813, TP: INR5,800, premised on DCF and 32x Sep’27 estimates), and BDL (CMP: INR1,543, TP: INR1,900, based on 42x Sep’27 estimates). We remain Neutral on Zen Technologies.

DAC approvals totaling INR790b augur well with our thesis

The DAC’s approval of projects worth INR790b is likely to benefit both leading defence PSUs and select private players. BEL is well-positioned to capture orders for electronic warfare, radar, and naval sensor suites, while HAL could leverage collaborative development opportunities for long-range autonomous systems and aerial platforms. BDL is expected to gain from missile and torpedo programs such as NAMIS and the advanced lightweight torpedo, while shipyards MDL, CSL, and GRSE are likely to secure contracts for landing platform docks and advanced surface vessels. Private players, including L&T, Tata Advanced Systems, and Bharat Forge, could see increased participation as tier-I and tier-II suppliers across vehicle platforms, artillery systems, and propulsion components. The scale and diversity of this approval signal a strong growth pipeline across the sector, potentially accelerating indigenization, supply-chain integration, and technological advancement in Indian defence manufacturing.

DPM 2025 enhances operational efficiency

The DPM 2025, effective 1st Nov’25, introduces sweeping reforms aimed at modernizing India’s defence acquisition process. Key measures include raising the limited tender threshold to INR5m, capping liquidated damages for indigenous manufacturers at 0.1% per week, and guaranteeing assured orders for up to five years for domestically developed systems. By streamlining approvals, reducing compliance burdens, and enabling revenue procurement of up to INR1 trillion annually, the new framework enhances operational flexibility for DPSUs while providing private players, MSMEs, and start-ups greater participation and predictability. Beyond procedural efficiency, these reforms are likely to strengthen India’s self-reliance in defence manufacturing, incentivize local innovation, and improve cost optimization for long-term projects.

Other positive developments for key defence companies

* The maiden flight of the LCA Tejas Mk1A, developed by HAL, took place on 17th Oct’25 in Nasik. The defence minister also inaugurated the third production line of the LCA Mk1A and the second production line of the HTT-40, an indigenous basic trainer aircraft designed and developed by HAL.

* The DRDO is expediting development of the RudraM-III hypersonic antiradiation missile, designed to extend the Su-30MKI’s strike range to nearly 550km at speeds above Mach 5 by late CY25. BDL will lead the initial production of over 200 missiles, marking a major step in strengthening India’s indigenous deep-strike and precision-attack capabilities.

* India has pitched the indigenous Akash missile system to Brazil, produced by BEL and BDL, an indigenous Indian medium-range surface-to-air missile (SAM) defence system designed to protect vulnerable areas, points, and assets from aerial threats.

* India plans to spend about INR654b over the next decade to procure roughly 1,100 engines for its fighter-jet programs. At the same time, India is accelerating efforts to indigenously develop its own fighter-jet engine ecosystem, including a derivative of the Kaveri engine for unmanned combat vehicles and a co-developed engine for its 5th-generation stealth fighter with interest from international firms.

Key monitorables

Going forward, we would watch out for 1) emergency procurement announcements that could fast-track critical platform and weapon acquisitions, 2) a step-up in the overall defence budgetary allocations in the upcoming years, particularly towards capital outlay and indigenization-linked schemes, and 3) incremental export opportunities for Indian defence manufacturers as the government intensifies its push to achieve the INR500b defence export target by FY29. Additionally, progress on project-level clearances, collaborative development programs with foreign OEMs, and faster execution under the iDEX and Make II frameworks will be key indicators of sector momentum

Valuation and recommendation

* BEL is currently trading at 43.0x/36.0x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR490 based on the 45x Sep’27E earnings.

* HAL is currently trading at 29.8x/24.3x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR5,800 based on the average DCF and 32x Sep’27E earnings.

* BDL is currently trading at 40.8x/29.7x FY27E/FY28E EPS. We maintain our estimates and reiterate our BUY rating on the stock with an unchanged TP of INR1,900 based on the 42x Sep’27E earnings.

* ZEN is currently trading at 30.7x/22.9x FY27E/FY28E EPS. We maintain our estimates and reiterate our NEUTRAL rating on the stock with an unchanged TP of INR1,550 based on the 30x Sep’27E earnings.

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