India's Defence Sector Set for 'Super Cycle' Driven by Geopolitics, Indigenous Push

India's defence sector is gearing up for a significant 'super cycle' of growth, propelled by increasing geopolitical conflicts and a strategic national focus on indigenous manufacturing, promising substantial opportunities for domestic defence companies.

The global defence sector is being driven by geopolitical conflicts and technological change.

Global military expenditure has risen 8.6 per cent compound annual growth rate (CAGR) in the past three years, which is more than twice the long-term average.

Nations are inducting missile defence systems, unmanned aerial vehicles (UAVs), space systems, and electronic warfare.

India's Strategic Defence Push

India is a key player as the world's largest defence importer and the fourth largest defence spender.

Policy is driving creation of an indigenous defence industrial ecosystem.

This may lead to a sustained, technology-intensive capex super cycle for domestic defence players.

The Defence Acquisition Council (DAC) has given approvals for additional acceptance of necessity (AoN) worth Rs 2.38 trillion.

The AoNs run across defence services and Coast Guard and cover a wide range in terms of focus, including surveillance, combat, and long-range strike capabilities.

These include Russian S400 long-range surface-to-air missile system, 155 mm Dhanush guns and a fleet of medium transport aircraft.

There's also approval for air defence tracked systems, armour-piercing tank ammunition and high-capacity radio relays, among others.

Key Procurements and Indigenisation Efforts

The Indian Air Force (IAF) may procure remotely-piloted strike aircraft and overhaul of Su-30 aero engine aggregates.

The Coast Guard may receive heavy-duty air cushion vehicles.

All these may be procured through imports or indigenisation.

Defence companies have strong order books and may benefit from exports.

There are near-term challenges in procurement of imported components.

Localisation is not only strategically desirable; it also results in margin gains.

Major Players and Future Outlook

One of the key beneficiaries of the defence capex is Bharat Electronics (BEL) which may develop the electronics suites for Navy's corvette programme for orders of Rs 12,000-15,000 crore by the first half (H1) of FY27.

The finalisation of a QRSAM order of Rs 30,000 crore is also expected in early FY27.

Hindustan Aeronautics' (HAL's) deliveries of Tejas Mark 1A fighter jet may begin in early FY27, after progress on key IAF requirements such as missile-firing trials, certification of weapons systems, and integration of Israeli-origin radar with the indigenous electronic warfare suite.

HAL says these will be done by April 2026.

The Ministry of Defence (MoD) has signed a pact with HAL for six advanced light helicopters (ALH) Mk-III for Rs 2,900 crore.

HAL has also received Cabinet Committee on Security (CCS) nod for light combat helicopters (LCH) 'Prachand' order worth Rs 65,000 crore.

Bharat Dynamics (BDL) has completed the first off-production model (FOPM) for advanced Akash weapon systems and may deliver these in the near term.

It has localised over 90 per cent of components for Akash and Astra missile systems.

This cushions possible supply chain risks. BDL is to commission its new facilities at Ibrahimpatnam, Telangana, and it is expecting order inflows of Rs 15,000 crore in FY27.

Astra Microwave (AMPL) has taken a board decision to demerge its space, hydrology and meteorology division as a separate entity, completing the demerger by Q1FY28.

AMPL will focus on defence and aerospace markets and retain stake in existing joint ventures (JVs) and manage wholly-owned subsidiaries, to be a pure-play defence & aerospace company.

Astra Space Technologies (ASTPL) will be in the new space, meteorology and hydrology businesses, operating as an independently-listed entity with a mirror shareholding identical to AMPL.

Zen Technologies may benefit from incremental orders and improved subsidiary performance while standalone business will gain from simulator and anti-drone orders.

In FY25, subsidiary revenue contribution was Rs 50 crore, which may rise to Rs 500 crore by FY28, driven by subsidiaries, ARIPL (100 per cent stake) and UTS (51 per cent stake).

The management says Zen's supply chain is currently not impacted by the Iran War.

Investment Considerations and Challenges

Defence revenues are always lumpy.

Investors need to monitor the finalisation of large projects in discussions like QRSAM, and next-generation corvettes.

Export order wins and government-to-government deals with other countries are another possible revenue stream while global supply chain issues are also a concern, given the geopolitics.

Based on FY27 estimated earnings, BEL is trading at price-to earnings (PE) of 41.5x. HAL is trading at 23.5x PE. More clarity on Tejas deliveries, where engines have been an issue, could boost the valuations.

BDL is trading at 36.2x PE.

AMPL is trading at 37.1x PE — the demerger may unlock value.

Zen is trading at 36.7x PE — the subsidiary performances are worth reviewing since growth would be driven by them.

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