India's Defence Ecosystem Is Just Starting Up | Open Interest

With India making a push to strengthen its defence capabilities further, there is a strong argument to be made that this ecosystem could grow tenfold over the next decade. Sector watchers believe that the growth will be driven by the acceleration of domestic defence manufacturing as well as India’s potential emergence as a global  hub.

With India making a push to strengthen its defence capabilities further, there is a strong argument to be made that this ecosystem could grow tenfold over the next decade. Sector watchers believe that the growth will be driven by the acceleration of domestic defence manufacturing as well as India’s potential emergence as a global  hub.

Some investors question whether the recent rally in defence stocks has left enough margin of safety. Defence stocks corrected significantly after hitting highs last year and even post the runup in recent times, as seen as the table below, many of these stocks are still trading at a discount to their 52-week highs.

A question also arises on the liquidity of defence shares, especially for the public sector companies. These companies are unlikely to see any significant equity dilution as the government may sell stake in small tranches, which will ensure liquidity remains scarce for these shares. 

Are these stocks trading at fair value? The answer depends on how one perceives the future of defence infrastructure and the opportunities it presents for Indian companies. For instance, just last week, the Defence Acquisition Council (DAC) approved emergency procurements worth Rs 40,000 crore, all of which must be executed within this year.

This comes in addition to the Rs 1.8 lakh crore of capital expenditure earmarked in the Union Budget. Moreover, in the coming months, the DAC and the Cabinet are expected to approve additional long-term equipment purchases for the armed forces.

Over the past two and a half decades, warfare has evolved from traditional, two-dimensional conflicts to multi-dimensional, technology-driven operations. Modern warfare integrates satellite systems and beyond-visual-range (BVR) capabilities with ground operations, creating seamless offensive and defensive strategies — as demonstrated during Operation Sindoor.

Following the Pahalgam terrorist attack, India's response in the form of Operation Sindoor marked a new era of warfare, utilising drone strikes and precision long-range missiles from BVR platforms. This evolution opens significant opportunities for Indian defence companies, particularly those collaborating with the DRDO to develop next-generation ammunition.

Public sector undertakings (PSUs) are expected to remain key system integrators, while private companies are increasingly becoming crucial solution providers. For example, Bharat Forge and Tata Group companies are leading efforts to replace and modernize high-end 155mm/52 calibre towed gun systems with autonomous variants.

The DRDO has also partnered with both public and private players to develop high-powered radar systems for the Indian Air Force. These systems, vital for surveillance and air defence, are capable of detecting advanced threats such as drones and stealth aircraft. Companies like BEL, L&T, Tata Advanced Systems, Paras Defence, Data Patterns, MTAR, and Astra Microwave are emerging as secondary and tertiary suppliers in this space.

India’s missile programme, initiated under Dr. A.P.J. Abdul Kalam, has now matured into a globally respected initiative. The successful deployment of air-to-air, air-to-ground, and surface-to-surface missiles during Operation Sindoor is expected to further energize India’s integrated missile development programme. Companies like Godrej & Boyce, BEL, BEML, Bharat Dynamics, and Mishra Dhatu Nigam — many of which have experience from ISRO’s space programme — play a pivotal role.

India’s progress in space-based defence systems is another promising area. The indigenous satellite navigation system, NavIC (Navigation with Indian Constellation), enables real-time navigation and lays the foundation for a domestic defence technology stack. This system aims to integrate communications, air defence, and weapon systems into a cohesive, high-tech shield.

India has already demonstrated its anti-satellite (ASAT) capabilities, joining a select group of nations capable of neutralising enemy satellites and disrupting their communication networks.

Post-Pulwama, air defence has emerged as a strategic priority. Hindustan Aeronautics Limited (HAL), which is leading the integration of aircraft with missile and drone capabilities, ended the fiscal year with an order book of Rs 1.8 lakh crore — equivalent to six years of revenue at current levels. The push towards developing indigenous fighter jets, including engines, marks a significant leap forward.

On the naval front, the deployment of the indigenous Aircraft Carrier INS Vikrant during Operation Sindoor, alongside a growing fleet of warships, reflects India’s expanding maritime capabilities. This has created strong order visibility for domestic shipyards such as Mazgaon Dock, Garden Reach, Cochin Shipyard, and L&T. Combined, they could receive orders worth over Rs 2.4 lakh crore in the coming years.

Despite many defence stocks doubling from their 52-week lows, they continue to trade 20–30% below their 52-week highs, the sector remains poised for long-term growth. With robust order pipelines and increasing geopolitical focus on self-reliance and strategic capabilities, India's defence sector is just beginning its ascent.