The Defence Budget is expected to see a significant boost
Defence company stocks listed on stock exchanges are expected to outperform the broader market as the government deepens focus on domestic manufacturing given the global geo-political uncertainty.
However, the potential in earning growth has already been captured in the stock prices after the recent rally in stocks.
In last one month, NSE Defence Index has gained 23 per cent or 1,647 points to 8,685 points from 7,038 points. In the same period, Nifty was up 2 per cent or 403 points to 24,750 against 24,347 points.
The Defence Budget is expected to be increased to 3-4 per cent of the GDP from the current 2 per cent level. With a $10 trillion GDP the defence budget is expected to grow to over $300 billion (₹30 lakh crore). This implies a 16-17 per cent annualised growth till 2035, according to smallcase manager Omniscience Capital.
The mid-term target for domestic defence production is set at ₹3 lakh crore by 2029. In FY25, domestic defence production crossed ₹1.4 lakh crore of which 78 per cent was contributed by the defence PSUs at about ₹1.1 lakh crore, according to “Operation Sindoor: An inflection point for Bharat’s Omni Defence Strategy” report.
The listed defence PSUs accounted for over ₹90,000 crore of this, accounting for 66 per cent of the total defence PSUs share. With increasing participation of the private sector, share of PSUs in the total defence production by 2029 may go down.
However, even at 60 per cent share, the total output is expected to double to ₹1.8 lakh crore, indicating a growth at 18 per cent CAGR over the next four years.
The total turnover of listed eight defence PSUs is expected to grow at 18 per cent and 22 per cent for FY26 and FY27 respectively. Nine unlisted PSUs combined are expected to report a cumulative turnover of over ₹20,000 crore in FY26.
However, the high valuation remains a concern. The median trailing price to earnings multiple of the eight listed defence PSUs was at 57 times. The forward median P/E for FY26 and FY27 is estimated at 45 times and 36 times indicating that the high growth potential is significantly priced in.
For some of the private sector names, the multiples are even higher and hence, investors are advised to be extremely cautious while allocating capital to specific names at current levels, said the report.
Vikas Gupta, smallcase manager and CEO, Omniscience Capital said as India becomes the third largest economy in 2027-28, it needs to protect its global trade lanes for uninterrupted shipment of its manufacturing goods and also needs to protect its global assets to support continued growth.
Published on June 2, 2025