Investing in India's Defense PSUs: A Structural Growth Story?
India’s defense sector is undergoing a fundamental transformation. With a rising focus on self-reliance (Atmanirbhar Bharat), increased capital expenditure, and growing exports, the government is providing a significant tailwind to domestic defense companies. Yesterday’s announcement by the defense minister—urging companies to triple their orders—is a strong signal of the sector’s long-term growth trajectory.
The Macro Tailwind: Defense Spending at an All-Time High
The Union Budget for FY25 allocated ₹6.81 lakh crore for defense spending, a 9.5% increase from the previous year. Of this, ₹1.80 lakh crore is designated for capital outlay, ensuring a steady flow of large-scale procurement projects. More importantly, a majority of the capital procurement budget is now reserved for domestic players, securing order flow for India’s defense PSUs.
India’s defense exports have surged from ₹1,521 crore in FY17 to ₹16,000 crore in FY23, with a target of ₹35,000 crore by 2025. This shift towards becoming an arms exporter is a pivotal moment, opening up new markets for Indian defense companies.
Key Players & Market Capitalization Growth
Mazagon Dock Shipbuilders (MDL) (₹90,127 crore market cap, +500% in 3 years)
India’s premier warship builder, responsible for submarines, stealth destroyers, and frigates.
Its strong order book and upcoming indigenous submarine programs make it a major beneficiary of India's naval expansion.
Hindustan Aeronautics Limited (HAL) (₹3.2 lakh crore market cap, +600% in 3 years)
The backbone of India’s aerospace defense, manufacturing Tejas fighter jets, Dhruv helicopters, and Sukhoi upgrades.
HAL has received large orders, including 100+ Tejas Mk1A jets, strengthening revenue visibility for the next decade.
Bharat Dynamics (₹40,000 crore market cap, +300% in 3 years)
Specializes in missile production, including Astra, Akash, and Pralay missile systems.
With increasing domestic and export demand for missiles, BDL is well-positioned for growth.
Garden Reach Shipbuilders & Engineers (GRSE) (₹25,000 crore market cap, +400% in 3 years)
A key manufacturer of warships and patrol vessels for the Navy and Coast Guard.
GRSE stands to gain from India’s focus on enhancing indigenous naval capabilities and coastal defense.
Is There Still Upside?
Defense stocks have witnessed significant rallies in the past three years, with many trading at multi-year valuation highs. However, several factors suggest that the sector’s growth story is far from over:
Order inflows are accelerating – The directive to triple defense orders will drive long-term revenue growth.
Export markets are opening up, as Indian defense technology gains recognition globally.
Shift from project-based revenues to long-term contracts, improving cash flow stability.
Risks to Consider
Execution & Bureaucratic Delays – Defense procurement in India has historically faced slow execution cycles. Any delays in project deliveries could impact earnings.
Cyclicality & Budget Allocation – While defense spending is at a high, future governments may reallocate funds to other sectors.
Valuation Risks – Many defense stocks have already seen multi-fold increases. Investors must assess whether current prices justify future growth.
Final Thoughts
India’s defense PSUs are at the center of a long-term structural shift, backed by government policy, rising global demand, and a focus on self-sufficiency. While valuations have surged, this sector could still be in the early stages of a multi-decade growth cycle. Investors should evaluate business fundamentals, execution capability, and order book strength before making long-term commitments.