CLSA has issued 'Outperform' ratings on all three major defence players with significant upside potential, as India's defence sector enters a transformative phase. HAL gets a target price of ₹5,481 (16.8% upside), BEL receives ₹522 target (35.3% upside), and L&T is assigned ₹4,842 target (26.8% upside). According to CLSA, defence capital expenditure has grown at 9.4% CAGR over the past decade, with the share of capital expenditure in the overall defence budget reaching 29.4% in FY27 budget estimates, its highest level in a decade. The brokerage expects defence capital outlay to increase to ₹2.19 lakh crore for FY27 from ₹1.86 lakh crore in FY26, with around 75% of total defence procurement planned to be sourced domestically, equivalent to about ₹1.61 lakh crore. CLSA notes that domestic defence production increased 22% year-on-year during the first nine months of FY26, reaching more than ₹1 lakh crore, while the Indian Army issued all its contracts to Indian players in FY26, compared with 68% in FY22.
Defence stocks witnessed significant gains on Thursday, 17 September, with the Nifty India Defence Index rising 1.3% compared to a flat Nifty, highlighting the sector's relative strength. Paras Defence and Space Technologies jumped 4.5% to ₹1,379.10, leading the gains among defence counters, while Data Patterns rose 4.2% to ₹4,506.05. MTAR Technologies advanced 3.8% to ₹7,060, BEML added 3.6% to ₹2,066.05, and Apollo Micro Systems gained 3.5% to ₹382.90. The rally was broad-based with Bharat Forge and BEL gaining 2% each, HAL up 1.5%, and BDL and Zen Technologies advancing 1%. This surge follows the Defence Acquisition Council (DAC) approving ₹1.1 lakh crore in acquisition proposals on September 8, with approximately 98% of procurements to be made from Indian Industry.
Defence Minister Rajnath Singh announced that the DAC accorded Acceptance of Necessity (AoN) to various acquisition proposals of the Defence Forces at an estimated cost of about ₹1,10,000 crore. The approvals cover multiple acquisition proposals for the Indian Army, Navy and Air Force, with Chemical Biological Radiological and Nuclear (CBRN) Recce Vehicles, High Mobility Vehicles (HMV), Self-Propelled Mechanical Mine Layers (MML), Advanced Light Helicopters (ALHs), Trawl Tanks and the Sarvatra Bridge System for the Indian Army. As per the Defence Minister, this shows commitment towards developing a strong defence industrial base in India. Motilal Oswal Financial Services (MOFSL) highlighted that DAC approvals during FY27 so far had reached ₹1.62 lakh crore, with across FY25 to year-to-date FY27, approvals worth ₹13 lakh crore had been accorded for the Indian defence sector, expanding the total addressable market for domestic defence companies. The Defence Acquisition Council cleared 55 capital acquisition proposals worth ₹6.73 lakh crore during FY26, with the institutional bridge between prototypes and orders strengthening through procurement categories and development-cum-production partner routes.
CLSA has assigned an 'Outperform' rating to Hindustan Aeronautics with a target price of ₹5,481, highlighting the company's transformation from licence manufacturer to platform owner. HAL's backlog grew 34% year-on-year in FY26 to ₹2.5 lakh crore, with the brokerage noting that almost all of HAL's platform orders currently under execution are of Indian origin, including the Light Combat Aircraft, HTT-40, Light Combat Helicopter, Light Utility Helicopter and Advanced Light Helicopter. HAL secured two major contracts during 2025 - a ₹62,400 crore contract for 97 LCA Mk1A aircraft and a ₹62,700 crore order for 156 LCH helicopters, with the LCA order alone adding about 50% to HAL's order book. CLSA expects a 15% EPS CAGR for HAL between FY25 and FY28, supported by its fighter aircraft pipeline, helicopter programmes, engine-related opportunities, aftermarket business and operating leverage. The brokerage expects HAL's market access, integrated design-to-production capabilities, aftermarket operations, net cash position and operating leverage to support its earnings trajectory.
CLSA has assigned an 'Outperform' rating to Bharat Electronics with a target price of ₹522, positioning it to benefit from increasing electronics content in defence equipment. BEL's revenue grew 16% to about ₹27,500 crore in FY26, while its order backlog increased 3% to ₹73,800 crore, according to CLSA. The brokerage noted that BEL was able to mine its backlog even though the order book was broadly flat during the year. Emergency procurement following India-Pakistan skirmishes provided additional boost, with contracts worth ₹31,100 crore awarded, where about 68% of these orders were awarded to Indian vendors. CLSA described BEL as India's second-largest defence public sector undertaking and a leader in radars, sonars, electronic warfare systems and missile integration, with rising electronics in defence equipment and its nomination for two multi-billion dollar projects serving as key catalysts for growth.
CLSA has assigned an 'Outperform' rating to Larsen & Toubro with a target price of ₹4,842, viewing the company as a key beneficiary of the India and Middle East capital expenditure cycle. L&T's diversified engineering and construction portfolio gives exposure to government, private-sector and industrial order inflows as well as projects in the Middle East. The brokerage expects double-digit growth in core engineering and construction execution, with margins potentially improving after several years of pressure. CLSA sees capital reallocation as another potential catalyst for the company, with themes supporting L&T including strong capital expenditure in India and the Middle East, a turnaround in loss-making businesses and efforts to improve return on equity. The brokerage expects the combination of strong capital expenditure in India and the Middle East, a turnaround in loss-making businesses and capital reallocation aimed at improving return on equity to support L&T's performance.
