- Capital spending jump: FY27 defence capex up 21.8% to Rs 2.19 trn, raising the share of capex in total defence spend to 28%.
- Order backlog explosion: Defence Acquisition Council approvals hit Rs 3.3 trn YTD FY26, a 50% increase over FY25.
- Valuation pressure: Large‑cap names like BEL, HAL and L&T trade at premium multiples after a steep rally.
- Execution risk: Complex platforms (submarines, fighter jets) bring schedule overruns and working‑capital strain.
- Sector ripple: Tata Defence, Adani Defence, and private shipbuilders are scrambling to capture indigenisation tailwinds.
You missed the fine print in the budget—and that could cost you.
How the FY27 Defence Budget Redefines India’s Capital Goods Landscape
The latest Union Budget earmarked Rs 7.84 trn for defence, roughly 15% of total spend, and boosted capital outlay by 21.8% year‑on‑year. Capital spending (capex) is the portion of the budget devoted to building assets—aircraft, ships, missiles—rather than paying for salaries or consumables. By pushing capex to 28% of total defence outlays, the government signals a shift from mere procurement to building a domestic industrial base.
This policy tilt aligns with a broader “Make‑in‑India” thrust, encouraging local firms to design and manufacture critical systems. The result is a longer, more predictable order pipeline for companies that can meet stringent defence specifications.
Order‑Book Dynamics: Why the Pipeline Is Getting Wider Than Ever
The Defence Acquisition Council (DAC) has already granted Acceptance of Necessity for projects worth Rs 3.3 trn in FY26, up from Rs 2.2 trn in FY25. These approvals span submarines, landing platform docks, air‑defence systems, drones, missiles and artillery. Faster procedural timelines, as promised by the Ministry of Defence, could compress the award‑to‑delivery window, translating into near‑term revenue spikes for manufacturers.
However, larger contracts also mean higher working‑capital requirements. Companies must fund long‑lead‑time components and manage foreign‑exchange exposure for imported subsystems, which can erode margins if execution lags.
Who’s Winning the New Defence Wave? Large‑Caps vs Niche Players
Analysts flag three large‑cap stalwarts—Bharat Electronics (BEL), Hindustan Aeronautics (HAL) and Larsen & Toubro (L&T)—as the most defensible bets. BEL benefits from its electronics‑heavy product mix, HAL from its fighter‑jet and helicopter programmes, and L&T from its engineering‑services arm that supplies shipbuilding and missile platforms.
At the same time, niche shipbuilders like Mazagon Dock and emerging platforms such as Solar Industries are gaining attention for their specialized order backlogs. These companies often trade at lower multiples but face higher concentration risk, as a single contract can dominate earnings.
Peer Landscape: How Tata and Adani Are Positioning Themselves
Tata Group’s defence arm, Tata Defence, has accelerated its acquisition spree, snapping up legacy aerospace firms and expanding its shipbuilding capacity. Although not yet listed, Tata’s moves could pressure existing listed peers on valuation grounds.
Adani’s foray into defence logistics and infrastructure—particularly ports and warehouses for naval assets—adds a complementary layer to the ecosystem. Their strong balance sheets may enable rapid scaling, but investors should watch for potential over‑extension.
Historical Lens: Past Budget‑Driven Rallies and Their After‑Effects
In FY2019, a 13% uplift in defence capex sparked a 35% rally in the sector’s index, only to be followed by a sharp correction when execution delays surfaced in major submarine projects. The lesson? Policy boosts create upside, but execution determines sustainability.
Similarly, the 2021 “Indigenisation Push” led to a surge in order‑book valuations, yet companies that failed to meet delivery timelines saw their shares underperform the broader market.
Valuation Reality Check: Are Prices Already Factoring In the Upside?
Current price‑to‑earnings (P/E) multiples for BEL and HAL sit above 30×, compared with a sector average of roughly 22×. The premium reflects expectations of double‑digit earnings growth, but also embeds a risk premium for execution risk. Investors should compare forward earnings estimates with the timing of projected contract awards to gauge whether the upside is already priced in.
Balance‑sheet strength—low debt‑to‑equity ratios and ample cash—will be a decisive factor in weathering any funding gaps during multi‑year projects.
Investor Playbook: Bull vs Bear Cases
Bull Case
- Continued geopolitical tension fuels sustained government capex growth of ~20% YoY.
- Accelerated DAC approvals translate into a steady stream of multi‑billion‑rupee contracts.
- Indigenisation drives higher margins for domestic component suppliers (e.g., BEL, Solar).
- Strong balance sheets allow firms to self‑finance working‑capital needs, preserving earnings quality.
Bear Case
- Execution delays on complex platforms (aircraft, submarines) compress margins and increase working‑capital strain.
- Valuations already reflect optimistic earnings forecasts, leaving limited upside.
- Overall government capex growth is moderating to high single‑digit levels, limiting incremental fiscal support.
- Competitive pressure from private conglomerates (Tata, Adani) could erode market share of listed peers.
Bottom line: The budget has undeniably expanded the growth canvas for India’s defence manufacturers, but the sector’s near‑term performance will hinge on who can turn paper orders into delivered assets without bleeding cash. Align your exposure with companies that combine a solid order backlog, disciplined execution, and a healthy balance sheet to navigate the volatility ahead.