Defence: Growth Fully Priced In?

The sector sees surging exports and rising capex, but investors need to be careful because of the steep valuations.

- By NILESH SHAH, MD, Kotak Asset Management Co. Ltd

INDIA'S DEFENCE SECTOR is undergoing a transformative evolution, marked by a strategic shift from being a major importer to becoming a global defence manufacturing powerhouse. This transition is driven by robust capital allocation, a surge in defence exports, and the launch of key indigenous programmes.

Capital allocation: Fuelling modernisation, indigenous growth
The government has significantly ramped up capital allocation to the defence sector, reflecting its commitment to self-reliance and modernisation. The defence budget for FY26 stands at ₹6.81 lakh crore, with a notable 13% increase in capital outlay. This allocation supports the acquisition of advanced weaponry, naval vessels, aircraft, and border infrastructure, while also funding research and development initiatives. Over the next five years, India is expected to spend approximately $150 billion in defence modernisation. This includes a domestic defence production target of ₹3 lakh crore by FY29, up from ₹1.3 lakh crore in FY24. The capital allocation strategy is aligned with the goal of increasing the domestic procurement share, which has risen from 54% to 75% in recent years. This shift underscores the government's intent to reduce dependency on foreign imports and bolster indigenous manufacturing. These investments are geared towards supporting key programmes, including the Light Combat Aircraft (LCA) MarkIA, Advanced Medium Combat Aircraft (AMCA), and Quick Reaction Surface-to-Air Missile (QRSAM) systems.

Rise in defence exports: Growing global footprint