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With a resolution of the West Asia crisisin sight, the focus would now shift toward the replenishment of ammunition, missiles, and critical inventories, alongside the acquisition and upgrade of various platforms. This is likely to open up export marketsfor defense players, apart from the domestic defense ordering. Focus would also be more on drones, anti-drones, electronic warfare, air defense control systems and active protection systems on both domestic and international markets. We expect these orders, along with large platform orders, to start materializing during FY27. Domestically, defense production moved up 16% YoY to INR1.78t for FY26 which is better than estimates. Bid submission has also concluded for MALE drone project worth INR300b inviting both PSUs and private players. In the near term, we would watch out for the easing of supply chain issues and the finalization of large orders for select players. We maintain our positive stance on the defense sector and Bharat Electronics remains our top buy in this space.

FY26 performance

Order inflows during the year remained healthy across the sector. While execution was broadly in line with our estimates, stronger-than-expected EBITDA margins across several companies led to PAT outperforming expectations. Within our coverage universe, BHE, HAL and ASTM delivered results ahead of estimates, whereas ZEN was impacted by a weaker opening order book for FY26 and BDL faced execution challenges due to delays in component supplies from external vendors, coupled with a higher share of bought-out components. NWC of private players remains relatively higher, while for DPSUs, it continues to be at comfortable levels. BHE, however, witnessed an increase in NWC due to lower customer advances and higher receivables. With a healthy order book position and the number of large contracts expected to be awarded over the near-to-medium term, we expect FY27 and FY28 growth to be driven by higher execution levels.

Key orders announced in FY26

Key defense contracts finalized during FY26 included an ~INR627b order awarded to HAL for the supply of 97 additional LCA Mk1A fighters. BHE secured total orders worth ~INR300b in FY26, including contracts for mountain radars, Atulya air defense fire control radars, ground-based mobile electronic systems (GBMES), and an avionics package for the LCA program from HAL. In addition, Solar Industries’ defense order inflows stood at ~INR40b, of which exports form ~70%. BDL secured multiple missile-related contracts aggregating ~INR55b, reflecting continued momentum in indigenous missile procurement.

Prospect pipeline remains strong

Management commentaries indicate a strong pipeline ahead for the defense sector players. BHE highlighted opportunities such as QRSAM, next-generation corvette (NGC), Shatrughat and Samaghat EW systems, P75I submarine, Hammer, Shakti Phase-4, Uttam radar, and naval multi-function radar (MFR). HAL boasts a strong near-term pipeline of ~INR900b over the next two years, which includes orders for 143 ALH helicopters, Sukhoi upgrades, and Dornier upgrade. Shipyard companies are expecting orders such as NGCs, P-17B frigate, P75I submarines, multi-purpose vessels, mine-countermeasure vessels, landing platform docks, etc. Private defense players are expecting a ramp-up in inflows in FY27, with ZEN having a strong bidding pipeline of ~INR15b with additional opportunities through single-vendor and nomination-based orders. ASTM expects large-sized orders, including QRSAM, Uttam radars, Su-30 upgrades, and BHE-linked platforms such as Himshakti. Data Patterns highlighted a strong and diversified order pipeline across multiple defense platforms, with visibility on repeat single-vendor opportunities worth ~INR19b over the medium term and ~INR15-20b of inflows targeted in FY27.

Exports to improve over the long term

Overall, India’s defense exports surged ~63% YoY to INR384b in FY26. The share of DPSUs in total defense exports improved significantly to 55%, while historically, it was largely dominated by the private sector for the supply of sub-components. India now supplies to over 80 countries, with products ranging from BrahMos missiles and Akash air-defense systems to naval vessels, Swathi radars and artillery. Most companies have set targets to further expand their export share in the coming years; however, it may take some time to show meaningful results. With an improved export share and increased indigenized content, we expect margins to remain at healthy levels for the defense players.

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