The defense budget can grow by 8 to 10% annually; execution key for defense stocks: Amit Anwani, PL Capital

India’s defense spending is unlikely to see a sharp jump as a percentage of GDP in the coming fiscal, but capital expenditure should continue to grow at a steady annual growth rate of 8-10% in the coming years, driven by a strong pipeline of approvals and ongoing procurement, said Amit Anwani, Lead Equity Analyst (Capital Goods, Industrials & Defense) at PL Capital.Speaking to ET Now, Anwani said that India’s defense expenditure has historically remained around 2-2.2% of GDP, while absolute expenditure has grown at a CAGR of 7-8% over the past seven-eight years. “With GDP expected to grow by 7-8%, defense spending as a percentage of GDP is unlikely to change materially. However, capital spending could grow 100 to 200 basis points faster than previous trends over the next two to three years,” he said.

Aircraft engines, rockets and electronics are likely to win

Anwani pointed out that the composition of the defense budget is more important than the nominal amount. The allocation to aircraft engines and aircraft has risen sharply in recent years to over ₹60,000 crore, which has supported strong order inflows for Hindustan Aeronautics. He noted that several helicopter orders are pending approval and HAL has indicated that it has an order pipeline of over ₹1 lakh crore awaiting approval.

Missile systems are another important area of ​​focus. Recent Defense Acquisition Council approvals, including for Astra missiles and QRSAM systems, could benefit defense electronics and missile makers such as Bharat Electronics and Bharat Dynamics, while electronics-focused players such as Data Patterns and Astra Microwave could also see gains as allocations increase.

Mega orders for submarines could transform MDL

On the proposed India-Germany submarine deal involving six advanced submarines, Anwani said Mazagon Dock Limited is a strong candidate due to its track record in implementation. “MDL has delivered the Scorpene class submarines and can field 10 to 12 ships at a time. With an existing order book of ₹35,000 to 40,000 crore, a submarine contract of over ₹40,000 crore would significantly increase long-term revenue visibility,” he said.

Margins remain stable; implementation is central

While PL Capital expects defense companies to achieve revenue growth of around 12% year-on-year, EBITDA margins are likely to remain largely stable. Anwani said HAL’s margins may normalize as manufacturing will account for a larger share of revenue than repair and overhaul work with higher margins, while Bharat Electronics is expected to maintain margins at nearly 27%.

“For investors, execution is now more important than winning big orders,” he said. “Order books have already expanded significantly across the industry. Timely execution, localization of supply chains and faster cash conversion will drive earnings returns in the coming years.”