Contemporary strategic imperatives compel nations to modernise their forces against hybrid threats including drone swarms and hypersonic missiles as exemplified in the Russia-Ukraine conflict. Asymmetric warfare in the Middle East exemplified the need for advanced precision-strike capabilities for rapid response. Escalating nuclear and cyber risks underscore the imperative for integrated, multi-domain defence systems. The persistent frequency of drone interceptions and border incursions demands robust national defence to deter aggression and safeguard sovereignty.
The Union Budget 2025-26’s allocation of Rs. 6.81 lakh crore to defence, i.e., a 9.5% increase from the previous year, signaled more than just incremental growth. It represented a fundamental recalibration of national priorities in an increasingly volatile world.
Looking at the current geopolitical landscape, it is characterised by unprecedented complexity. Border tensions, maritime security challenges, and the rapid evolution of warfare technologies have compelled nations worldwide to reassess their defence capabilities. India, with its strategic position in the Indo-Pacific and diverse security challenges, finds itself at the centre of this global recalibration.
What makes this moment particularly significant is the convergence of three powerful forces being heightened security imperatives, technological disruption, and a maturing domestic industrial ecosystem. This union creates compelling investment opportunities that extend far beyond traditional defence manufacturing.
Atmanirbhar Bharat: From Vision to Execution
Our house view is where we believe that the Atmanirbhar Bharat initiative has transformed India’s defence manufacturing landscape. The indigenous defence production reached a record Rs. 1.54 lakh crore in 2025, while defence exports grew approximately 12% to Rs. 24,000 crore. Besides this over 65% of India’s defence equipment is now produced domestically showcasing a remarkable shift for a nation that was once among the world’s largest arms importers.
The government’s decision to earmark 75% of the capital procurement budget, which is around Rs. 1.48 lakh crore, for domestic suppliers creates a predictable, long-term revenue pipeline for companies positioned to capture these opportunities. Unlike cyclical sectors vulnerable to economic headwinds, defence manufacturers benefit from multi-year contracts, government backing, and strategic importance that transcend short-term market volatility.
Furthermore, with the defence modernisation agenda encompassing several high-growth subsectors, each presenting distinct investment merits, ranging from aerospace and aviation, naval systems and maritime security, to electronics and missile systems, to emerging technologies. Notably, the government’s increased allocation to the Defence Research and Development Organisation to the tune of Rs. 26,816 crore, up 12.4%, signals serious intent to develop local capabilities in these transformative technologies.
From an investment perspective, defence companies offer several attractive characteristics that merit consideration in a diversified portfolio. Multi-year order books provide exceptional revenue visibility, a rarity in today’s uncertain economic environment. Major defence PSUs carry order books worth thousands of crores, translating into 5-10 years of assured business. Defence spending maintains relative stability even during economic downturns. National security considerations ensure continued government support and budget allocations, making these stocks less correlated with broader economic cycles.
Besides this, India’s defence exports have grown nearly 35-fold over the past decade, with products now reaching over 100 countries. This export momentum provides companies with revenue diversification beyond domestic procurement cycles and exposure to global markets with higher margin potential. Furthermore, companies investing heavily in R&D and emerging technologies are positioning themselves for long-term competitive advantage. The shift toward autonomous systems, AI-driven platforms, and cyber capabilities creates sustainable channels. Lastly, the expanding role of private companies in defence manufacturing is injecting competitive dynamics, innovation, and operational efficiency into a sector traditionally dominated by public enterprises. This creates new investment opportunities across the market capitalisation spectrum.
Looking Ahead: Budget Expectations and Multi-Decade Opportunity
India’s defence modernisation is a multi-decade transformation aligned with the nation’s Viksit Bharat 2047 vision. The government declared 2025 as the “Year of Reforms” for the defence sector, signaling accelerated policy initiatives, streamlined procurement, and enhanced private sector participation.
At HDFC Securities, we believe there is a high probability of the following measures being included in the upcoming budget:
The defence budget is expected to see a significant increase in capital expenditure, enabling the introduction of new defence projects. This boost is intended to modernise and expand India’s infrastructure and increase the ordering of defence equipment from domestic players. There will be a focus on promoting defence exports, in line with the government’s vision to make India a global defence manufacturing hub.
Alternatively, there is a low probability that the government will introduce policies to allow foreign entities to invest in the Indian defence sector, thereby promoting collaboration and technology transfer.
Looking ahead, several catalysts are set to sustain this momentum: the projected budget increase for FY 2026-27, milestone contract awards most notably the Rs. 1 lakh crore P-75(I) submarine program and a growing export portfolio as India cements its reputation as a reliable defense partner. Furthermore, strategic technology partnerships continue to bolster domestic capabilities and localization efforts.”
For investors with a long-term horizon and an appreciation for structural growth stories, India’s defence sector offers a compelling opportunity to participate in a strategic national priority while potentially generating attractive risk-adjusted returns. As with all investments, careful research, diversification, and alignment with individual risk tolerance remain essential. In conclusion, as investors build portfolios for the future, the defence sector merits serious consideration as a core strategic holding.
(The author is MD & CEO, HDFC Securities)
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