How India’s defence sector is going all guns blazing

With an aim to become a defence powerhouse, the Centre last week pledged to more than double India’s annual military exports to ₹50,000 crore by 2028-29. The sector is witnessing significant growth driven by rising defence budgets and focus on indigenisation that bodes well for companies in this segment. Poised for further growth and lucrative order flow opportunities, this space is getting attention as an attractive investment proposition. Motilal Oswal Asset Management Co. recently launched India’s first index fund offering exposure to listed defence stocks. Mint takes a look at the sector's explosive show.

Impressive exports

The country’s military exports have frequently seen 20-30% annual growth over the last few years and seemingly look aligned with the new government target. The private sector has majorly contributed to this growth, with its share being high. Add to that India being the world’s fourth-largest defence spender in 2023, up from being the ninth largest in 2009. India’s spending rose by 4.2% from 2022. “The sector is poised to capitalize on a projected $138 billion ordering opportunity from 2023-24 to 2031-32, driven by increasing demands for equipment and services. Government initiatives promoting indigenous manufacturing and technology development are key factors," said Arvinder Singh Nanda, senior vice president, Master Capital Services Ltd.

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Budgetary support

With greater focus on localization and self-reliance, there has been a progressive increase in allocation of the defence budget. On an average, the government’s defence spending grew around 10% per year between 2017-18 and 2021-22. The budgetary allocation for fiscal year 2024-25 rose by 5.8% over 2023-24, and 18.4% over the allocation of 2022-23. A major share (70.7%) was allocated to revenue expenditure, and the rest on capital expenditure in the interim budget. "The anticipated policies aim to increase defence capital expenditure to 37% of the total budget by 2029-30, demonstrating a strategic commitment to sectoral expansion and modernization,” he said.

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Private sector on a high

These shifts have played in favour of domestic defence companies with impressive growth both in their revenue as well as profits. They are looking to tap substantial growth opportunities with the private sector’s high contribution in India’s total defence exports. The healthy profitability and improving balance sheet strength of the listed companies in this space has attracted both domestic and overseas investors, both of whom have raised stakes in some stocks in this segment.

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Stocks on fire

The most visible impact of this explosive growth is the run-up in the prices of defence stocks. Most have seen fiery returns both year-to-date and in the past one month. The Nifty India Defence Index, which tracks defence activity-related companies, has been continuously outperforming the 50-share blue chip index since last year.