Defence stocks lock and load for order-driven growth offensive in Q4

War chest of opportunities: DefMin loads new tech ammo to fortify revenue and earnings potential

The defence ministry’s focus on modernisation, new technologies, and exports, along with the concentration of orders in the fourth quarter (Q4) of 2024-25 and long-term growth opportunities from indigenisation, are expected to strengthen the revenue and earnings potential of India’s defence sector.

 

The recent decline in stock prices of listed defence majors has made the risk/reward equation more attractive for investors, according to brokerages. While stock prices for listed companies have risen 2.5x over three years, high valuations, slower order inflows, and challenges in execution and supply chains have resulted in a 19 per cent correction over the last six months.

 

With the government being the primary driver of defence acquisitions, the recent announcement that 2025 will be a year of reforms in the sector — aiming to modernise India’s defence capabilities, streamline acquisition procedures, focus on new technologies, and facilitate technology transfer between defence and civil sectors — will benefit both government-owned and listed private defence companies.

 

D Naveen Kumar, associate director at CareEdge Ratings, explains that regulatory reforms designed to simplify procurement and promote private sector involvement will create an environment conducive to innovation and investment. These combined factors are expected to propel the industry’s growth by roughly 20 per cent annually between 2023-24 and 2028-29 while maintaining an operating profit margin of around 20 per cent.

 

Among the key near-term drivers for the sector is the expected increase in defence spending in the January-March quarter and in calendar year (CY) 2025. Analysts at Antique Stock Broking, led by Dhirendra Tiwari, note, “Although defence capital spending was soft in the first half of FY25 (down 20 per cent year-on-year/Y-o-Y), activity is expected to pick up in Q4FY25 with multiple large-ticket orders lined up for finalisation.”

 

The government has maintained its defence capital outlay at Rs 1.7 trillion for the Budget, reflecting a 9 per cent Y-o-Y increase. Recent order finalisations, including large-ticket items like the Sukhoi engines and Sukhoi Su-30MKI (Rs 40,000 crore order), indicate a positive trend. Antique Stock Broking expects order awards to remain high in Q4FY25, improving visibility for key defence companies. The brokerage sees the recent price correction as an entry point for investment and recommends Hindustan Aeronautics, Bharat Electronics (BEL), and PTC Industries as top picks in the sector.

 

Elara Securities also expects big order inflows in Q4FY25, pointing to a 700-basis point Y-o-Y increase in the share of defence spending (36 per cent) from April to October 2024. The January-March quarter’s spending will include the import of Rafale M fighter aircraft ($4 billion) and MQ-9B drones ($3 billion), alongside domestic orders for next-generation corvettes (Rs 36,000 crore).

 

The speed of order awards by the defence ministry is reflected in the domestic acceptance of necessity (AoN). Between 2022-23 and December 2024, Rs 8.3 trillion worth of AoNs were approved, 53 per cent higher than the total value of domestic AoNs approved between 2012-13 and 2021-22 (Rs 5.4 trillion). Given the pace of recent awards, analysts Harshit Kapadia and Nemish Sundar of Elara Securities foresee a substantial increase in contract awards over the next two to three years. They remain optimistic about India’s defence sector, which is expected to see substantial growth over the next decade driven by indigenisation and exports. The brokerage favours HAL and BEL.

 

Brokerages predict that CY 2025 will be a pivotal year, as orders for major programmes such as quick reaction surface-to-air missiles, Project-75 India (submarine acquisitions), light combat aircraft Mark 1A, and Pinaka multi-barrel rocket launchers are likely. Industry growth is expected to focus more on the Air Force and Navy. Nuvama Research is optimistic about the Indian defence space, citing catalysts such as a large-scale push for localisation to reduce reliance on disrupted global supply chains and continued modernisation efforts with larger programmes expected ahead of schedule. Among the sector’s subspaces, the brokerage is particularly bullish on defence electronics and recommends BEL and Data Patterns (India). 

CMP: Current Market Price  Source: Bloomberg  Compiled by: BS Research Bureau