Rs 1.78 trillion in production, Rs 384 billion in exports, private sector scaling fast — the cycle is real. But execution and localisation now separate the winners from the rest. SOIL and BEL lead the picks.
India’s defence sector has arrived at a genuine inflection point. Production in FY26 reached an all-time high of Rs 1.78 trillion — up 15.6% year-on-year and more than double the FY21 level. Exports hit a record Rs 384 billion.
The private sector’s contribution expanded to approximately 24% of total production, or Rs 420 billion — a structural shift in who builds India’s defence hardware that would have been unthinkable a decade ago. The tailwinds are intact and the numbers are impressive. But the more important question for investors is not whether the defence sector grows — it will — but which companies convert that growth into earnings efficiently and quickly.
From Indigenisation to Deployment
The first phase of India’s defence indigenisation push was about building the capability to manufacture domestically — creating production lines, qualifying suppliers, standing up DPSUs and private sector manufacturers, and substituting imports with domestic alternatives. That phase has largely been accomplished. India now has a credible domestic production ecosystem across multiple platforms and sub-systems.
The next phase is different. “The sector is transitioning from building domestic manufacturing capability to accelerating deployment of advanced defence systems,” says Nuvama in a report. The focus is shifting toward missiles, air defence systems, electronic warfare, radars, unmanned platforms and precision ammunition — technology-intensive, capability-enhancing systems where the value is in the intellectual property and systems integration as much as the manufacturing.
The recent Rs 520 billion in Acceptance of Necessity approvals validates this shift. “This favours companies with indigenous capabilities, faster execution cycles and stronger control over critical technologies,” the report states — a framework that immediately points toward BEL and SOIL over the more complex platform integrators.
Why Execution
Order visibility across the sector is strong — multi-year backlogs exist across the coverage universe. The order book is not the differentiator. What differentiates stocks from here is earnings conversion — the ability to translate order wins into revenue and margin, reliably and repeatedly.
This is where the execution and localisation framework becomes the central investment lens. Companies with shorter execution cycles — where the gap between order win and revenue recognition is measured in months rather than years — generate more predictable earnings.
Companies with higher localisation — where indigenous content reduces dependence on import clearances, global supply chains and vendor approvals — face fewer execution bottlenecks. And companies with consumable or electronics-led revenue streams, rather than large platform integration contracts, tend to have more consistent margin profiles.
SOIL and BEL score well on all three criteria. HAL and BDL — both important parts of the defence ecosystem — face more complex programme execution environments and greater supply chain dependencies, which makes their near-term earnings harder to predict even with strong order books.
SOIL — The Consumable Play
SOIL sits in the consumable-led segment of the defence supply chain — a category where products are used, replenished and reordered in recurring cycles rather than sitting in long-gestation platform programmes. This business model generates faster revenue recognition, more predictable demand and a margin profile that benefits from operating leverage as volumes scale.
The financial case is compelling. SOIL is expected to deliver EPS CAGR of 39% over FY26-28 — the strongest in the coverage universe — with return on equity of approximately 31% by FY28. At 48x FY28 earnings, the valuation is not inexpensive, but it reflects the quality of the earnings trajectory and the visibility that comes from the consumable demand cycle. For a business growing EPS at 39% with high RoE, the multiple is defensible.
BEL — The Defence Electronics
Bharat Electronics Limited is the other top pick — and its appeal is different from SOIL’s. BEL is India’s pre-eminent defence electronics and subsystems company, with deep relationships across all three services and a product portfolio spanning radars, communication systems, electronic warfare, and command and control systems. As the next phase of India’s defence procurement shifts toward electronics-intensive capability enhancement, BEL’s positioning becomes more central rather than less.
BEL is expected to deliver sustained EBITDA margins of 27% or above, supported by operational efficiencies and the localisation benefits that come from decades of indigenous technology development. EPS CAGR of 14% over FY26-28 is lower than SOIL’s but reflects a larger and more mature base — and a 25% RoE profile that speaks to the capital efficiency of the franchise. At 38x FY28 earnings, BEL trades at a discount to SOIL that reflects the lower growth rate but offers more predictable earnings delivery given BEL’s shorter execution cycles relative to platform integrators.
HAL and BDL — Strong Visibility, Harder Near-Term Path
Nuvama has distinguished between long-term strategic importance and near-term earnings convertibility. While HAL and BDL both have strong order books and play critical roles in India’s defence ecosystem. HAL’s LCA Tejas and other platform programmes represent genuine long-term value. BDL’s missile and ammunition franchise is strategically irreplaceable.
The near-term challenge is execution. HAL’s deliveries remain constrained by LCA Tejas programme milestones and the inherent complexity of aircraft manufacturing. BDL’s recovery depends on improving execution run-rates and margin normalisation after a period of below-expectation delivery.
Q1FY27 — What to Expect
The near-term picture going into Q1FY27 results reflects these dynamics. BEL is expected to deliver steady execution with margins sustained above 27%. SOIL and DPIL should continue benefiting from defence mix tailwinds, operating leverage and shorter-cycle opportunity flow. HAL’s execution remains constrained by platform delivery timelines. BDL’s recovery trajectory will be the key variable to watch.
What the Numbers Look Like
| Company | EPS CAGR FY26-28E | RoE FY28E | Valuation | Preference |
|---|---|---|---|---|
| SOIL | 39% | ~31% | 48x FY28E PE | Top Pick |
| BEL | 14% | ~25% | 38x FY28E PE | Top Pick |
| DPIL | Strong | — | — | Preferred |
| HAL | Strong visibility | — | — | Longer cycle |
| BDL | Recovery dependent | — | — | Longer cycle |
Source: Nuvama