Where Will Defence Stocks be in Next Three Years?

In 2026, the Indian defence sector is transitioning from a phase of "order anticipation" to a "high- execution" phase.

Looking three years ahead to 2029, the landscape for defence stocks is projected to be defined by massive scale, in-line with the government's ambitious long-term production and export targets.

By 2029, the Indian government aims to nearly double the sector's current output. This provides a clear roadmap for revenue growth among top-tier defence firms.

Source: PIB

In 2024-25, the nation saw record defence production, record defence export and a record budget for the Defence Ministry of Rs 6,810 bn.

Growing Private Sector Contribution

The annual defence production soared to a record figure of Rs 1,510 bn in FY25.

Defence Public Sector Undertakings (DPSUs) and other PSUs accounted for approximately 77% of total production, while the private sector contributed 23%, an increase from 21% in FY24. This reflects the sector's growing role in the defence ecosystem of the country.

A target has been set to increase defence manufacturing to Rs 3,000 bn by 2029 and the private sector is expected to corner a good share.

Huge Production Targets Sound Good but...

Private and public sector companies alike stand to gain from these ambitious production targets. Over the next three years, production is projected to grow from Rs 1,500 bn to Rs 3,000 bn, a compound annual growth rate (CAGR) of 26%.

However, there are some challenges.

Let's take a look...

Challenges to Watch

While the outlook is bullish, investors should be cautious...

• Valuation Fatigue: Many defence stocks have already seen a massive run-up. High price-to-earnings (PE) ratios mean the market has already "priced in" much of this growth.

  Company Name	PE ratio as on 21 January 2026
  HAL	34.2
  Bharat Dynamics	80
  BEL	52
  Cochin Shipyard	49.9
  Garden Reach Shipbuilders	42.5
  Mazagon Dock	43.1
  Paras Defence	74.6
  Data Patterns	53.6

  Source: Equitymaster

  In almost all cases, the stock's current PE is above its median PE. For example, in the case of Hindustan Aeronautics the PE ratio for fiscal years ending March 2021 to 2025 averaged just 21.8 times, as against 34 now. In the case of stocks like Bharat Dynamics too the PE is very high.

• Conversion: Order conversion from approvals to firm contracts could remain slow. Big companies struggle with delivery timelines on major programs due to stretched timelines, eroding near-term revenue visibility. This staggered execution tempers multi-year growth assumptions baked into current valuations.

  A company may have a massive Rs 1,000 bn order book, but if it takes 7 years to deliver those orders, the "annualised" growth might not justify a high PE multiple.

• Risks with imports

  India's reliance on imported critical components (e.g., engines, avionics) exposes firms to global disruptions and forex risks, with indigenisation lagging at 60-70% for complex systems. The MSME ecosystem for defence lacks scale for high-volume missile/radar production, causing cascading delays.

• Margin Compression

  Many investors assume that more orders mean more profit. However, as the government moves toward competitive bidding (where large private players could emerge), profit margins may shrink.

Should You Consider Defence Stocks Now?

Defence stocks experienced a significant surge in 2025, even though certain segments underwent a correction. While there is unlikely to be a shortage of orders, the key concern will revolve around execution, particularly for some of the larger PSUs.

For investors, examining valuations has become the single most critical task in Indian defence stocks. The sector's story, driven by Atmanirbhar Bharat, remains structurally strong but the market will likely transition from a "buy-at-any-price" phase to a "show-me-the-earnings" phase.

That said, if geopolitical tensions resurface, defence stocks could be in the limelight all over again.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

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