Indian defence companies have consistently reported stronger profitability than many global counterparts in recent years, with average EBITDA margins of around 22% during FY2021-25 compared to roughly 14% for global defence manufacturers, according to Kotak Institutional Equities analysis. However, when analysts adjust these margins to account for differences in R&D spending, the profitability gap shrinks to around 450 basis points, suggesting that a meaningful portion of the higher margins reported by Indian companies stems from lower R&D intensity rather than purely stronger operating performance.
The report reveals significant differences in R&D investment patterns between Indian and global defence manufacturers. Indian defence firms spent an average of 3.5% of revenue on R&D between FY2021 and FY2025, compared with 5.9% for global peers—nearly twice as much. This structural difference reflects India's defence ecosystem, where companies rely heavily on the government-funded Defence Research and Development Organisation (DRDO) for core technology development. In FY2024 alone, DRDO signed more than 250 technology transfer licensing agreements with Indian companies, allowing manufacturers to avoid much of the upfront cost and risk associated with developing advanced defence systems.
According to a study from FAST India, the innovation disparity between Indian and global defence manufacturers extends beyond R&D spending levels. Indian defence companies generate only around 7.3 patents for every US$1 billion in revenue, compared with nearly 240 patents per US$1 billion among global peers. This disparity suggests that India's challenge extends beyond lower R&D expenditure and includes relatively lower levels of proprietary innovation and intellectual property creation. The business model followed by global defence companies involves heavy investment in developing proprietary technologies and next-generation military platforms, including hypersonic weapons and autonomous platforms, which significantly increases R&D costs.
The government's Make in India and Aatmanirbhar Bharat initiatives have accelerated the indigenous manufacturing model, which has gained further momentum under the current framework. Instead of designing every major platform from scratch, many Indian companies manufacture or indigenise proven systems through technology transfer agreements with foreign original equipment manufacturers. This approach enables faster localisation of production, strengthens domestic manufacturing capabilities, and supports import substitution while keeping development costs relatively low. The strategy has helped domestic defence companies expand production, improve execution, and win larger government orders without incurring the same level of research expenditure seen among global defence majors.
