She added that the quality of order books – including factors such as contract visibility, subsystem intensity, repeat programs and export mix – have become more important than just size. With nearly ₹3 trillion in defense procurement approvals by 2025, industry-wide backlogs are expected to increase further, supported by major programs such as QRSAM and landing pad docks.
Execution visibility is strong, but timing is uneven
Responding to investor concerns around the execution, Gupta said defense revenues are inherently lumpy. “Program cycles typically range from 18 to 48 months and are influenced by complexity, testing, certification and lead times of imported components. Revenue conversion often occurs toward user trials and final acceptance,” she said.
While PSUs offer predictability over large platforms, execution is slower. In contrast, private players benefit from flexible manufacturing, stronger supplier ecosystems, and faster design iterations, enabling faster delivery of subsystems. “The first half is usually slower, while the second half is usually very strong. Some volatility from quarter to quarter is part of the business,” said Gupta.
The valuations reflect a structural shift
On the valuation front, Gupta says higher valuations are justified as the sector has transitioned from a cyclical production play to a structural, long-term growth story. “Private defense companies have higher valuations due to higher margins, IP-heavy niches and faster execution, with 20-30% growth potential. PSUs trade at more moderate premiums and offer stable cash flows and long platform pipelines,” she noted.
She also highlighted improving fundamentals, with margins stabilizing, working capital tightening and capital intensity decreasing as companies move to design and subsystem-driven models. However, near-term earnings will continue to exhibit volatility due to milestone programs.
Margins stable; working capital pressure manageable
Gupta expects FY25 margins to largely hold up into FY26 and FY27. “There could be a small increase of 20 to 50 basis points as new projects with higher margins come to fruition, but no major margin surprises are expected,” she said.
Turning to private sector balance sheets, she recognized the pressure on working capital resulting from long inventory cycles – often averaging 250 days or more – in a monopsony market. “Some tension is inevitable but is structural for the sector and not a major problem at this stage,” she added.
Budget support and rare earth risks
Looking ahead to the Union Budget, Gupta expects an increase in defense allocations, although clearing existing backlogs remains the priority. “India already has a huge order pipeline that needs to be delivered. Additional allocations will further benefit private players, but capacity execution will be critical,” she said, adding that sentiment in the sector will remain strong over the next five years.
She also flagged the partial dependence on rare earths, where China dominates global supply, as a risk area for defense production.
Top picks: HAL, BEML, Data Patterns, Solar Industries
Among her preferred stocks, Gupta highlighted Hindustan Aeronautics (HAL), citing fighter shortages and improved execution visibility. BEML stands out for strong defence, rail and metro orders, with an order book of nearly ₹28,000 crore. She also expects Data Patterns to deliver earnings surprises on favorable order mix and new products, while Solar Industries remains a key beneficiary of missile and munitions programs like Pinaka, supported by timely execution.
“The defense ecosystem as a whole should perform well, but select companies will emerge as outliers over the next six quarters,” said Gupta.
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