India’s defence sector is back in focus after a prolonged phase of underperformance, with the Nifty Defence index staging a sharp rebound in 2026. The rally has sparked a critical debate among investors. Against a backdrop of increasing defence budgets, execution momentum and export traction, the sector is transitioning from a speculative theme to a more earnings-backed story.
In an exclusive conversation with BW Businessworld, Putta Ravi Kumar, Defence Analyst at Choice Institutional Equities, breaks down the drivers behind the recent rally, the evolving role of exports and how Indian defence companies stack up against global peers.
He also addresses concerns around valuations, retail-driven volatility and the distinction between momentum and long-term opportunity, offering a grounded perspective on whether the sector’s growth is sustainable and how investors should approach it.
Edited excerpts:
Nifty Defence has been muted for over a year but surged sharply in 2026. Is this a structural re-rating or just a geopolitical trade?
The recent surge in Nifty Defence is not purely a geopolitical trade, but a mix of valuation reset and improving fundamentals. Over the past year, the index remained largely muted despite global tensions, primarily due to elevated valuations and execution delays, with many stocks correcting 20–40 per cent from their peaks
The 2026 rally is being driven by strong Q4 earnings visibility, where defence companies typically deliver a disproportionate share of annual revenues (often 30 to 50 per cent of yearly execution), along with order inflow momentum supported by India’s defence budget growth
Additionally, a robust order book pipeline (2 to 5 times book-to-bill for key players) is improving earnings visibility. Therefore, the move reflects an early-stage structural re-rating, supported by cyclical triggers
Do Indian defence stocks benefit from global conflicts the way US defence majors do, or is their growth still largely domestic order-driven?
Indian defence companies do not yet benefit from global conflicts to the same extent as US defence majors, where revenues are deeply linked to allied war-time replenishment cycles. In India’s case, 80 to 90 per cent of revenues remain domestically driven, backed by government orders
That said, global conflicts are indirectly positive, they accelerate export opportunities and defence budgets globally. India’s defence exports have scaled from Rs 1,500 crore in FY17 to over Rs 38,424 crore in FY26, 25 times growth, driven by cost competitiveness and increasing acceptance of platforms like missile systems and radars
However, export conversion cycles are long and lumpy. Hence, near-term growth remains domestic-led, while global conflicts act as a medium- to long-term optionality, not an immediate earnings driver
How do Indian defence companies compare globally in terms of scale, margins and export competitiveness?
Indian defence companies still lag global peers in scale, with most domestic players significantly smaller than global majors like Lockheed Martin or RTX Corporation, which operate at multi-billion-dollar revenue scales with global order diversification
On margin, Indian players are relatively competitive, with EBITDA margin in the 15 to 25 per cent range, broadly comparable to global peers, supported by lower labour costs and government-backed orders
Where India is improving rapidly is export competitiveness, driven by 20 to 30 per cent cost advantage and increasing acceptance of indigenous platforms. India is not yet a scale player globally but is emerging as a cost-competitive challenger with strong growth optionality
Which regions or countries are driving export demand for Indian defence companies, and how sustainable is this trend?
Indian defence exports are increasingly diversified across regions but remain concentrated in a few key markets. Southeast Asia and neighbouring regions such as Myanmar, Philippines, Sri Lanka and Bangladesh, have been major buyers, collectively accounting for a significant share of exports. Additionally, strategic partnerships are emerging with countries like Armenia, while developed markets including the US, France, and UAE are importing components and subsystems
India now exports to 80 to 100 countries, with exports rising sharply to Rs 38,424 crore in FY26, indicating strong demand momentum. In terms of sustainability, the trend is supported by cost competitiveness, geopolitical diversification of supply chains and government push, but remains order-driven and lumpy, making consistency the key monitorable going forward.
Defence stocks have seen sharp rallies and corrections. Are current valuations justified by earnings visibility, or are we seeing speculative excess?
Valuations in defence are partially justified but increasingly bifurcated. On one hand, strong earnings visibility is supported by robust order books, improving execution and a sustained defence budget push, which underpins 15 to 20 per cent earnings CAGR visibility over the medium term. However, the sharp rallies have led to valuation expansion ahead of earnings in certain pockets, with some stocks trading at a premium to their historical averages
Importantly, this is not uniform, large players like Bharat Electronics, Hindustan Aeronautics and Bharat Dynamics still offer relatively better earnings visibility backed by execution pipelines. Hence, the sector is not in a bubble but requires stock-level selectivity rather than broad-based re-rating assumptions
Many defence stocks are retail-heavy and highly volatile. How should investors differentiate between momentum and long-term opportunity?
Investors need to separate momentum from fundamentals using three filters. First, order book strength and visibility, companies with 3 to 5 times book-to-bill and multi-year execution pipelines offer stronger long-term conviction. Second, execution consistency, as defence remains backend-loaded with second half (H2) contributing 60–70 per cent of annual revenues, making delivery track record critical.
Third, return ratios and margin stability, sustainable players typically maintain EBITDA margins of over 20 per cent and improving ROE profiles
For investors looking to play geopolitical tensions, does it make more sense to look at US defence stocks rather than Indian ones?
It depends on the investment objective. If the intent is to play immediate geopolitical escalation, US defence majors are more directly linked, with revenues tied to global military alliances and replenishment cycles, leading to quicker earnings translation during conflicts
However, India offers a structural growth story, supported by a rising defence budget, indigenisation push, and multi-folds rise in exports. Hence, US stocks offer near-term geopolitical beta, while Indian defence provides long-term compounding with optionality, making them complementary rather than substitutes |
