Kotak Institutional Equities remains positive on India's defence sector long-term fundamentals but maintains a cautious stance on valuations. According to analyst Deepak Krishnan, the brokerage expects India's defence capital expenditure to grow at an annual rate of around 11% over the next four to five years after a sharp jump in FY27. This growth outlook is backed by continued government focus on military modernisation, import substitution and geopolitical uncertainties that are keeping defence spending elevated globally. However, Indian defence companies are trading at roughly a 50% valuation premium to their global peers, leaving limited room for broad-based upside despite the positive structural story.
Kotak Institutional Equities has initiated coverage on Hindustan Aeronautics Ltd (HAL) with an 'Add' rating and fair value of ₹4,810. According to reports from Goodreturns, the brokerage believes HAL is well positioned to benefit from India's growing defence manufacturing push, a healthy order pipeline and rising government spending on indigenous military aircraft. Its strong execution capabilities and long-term visibility on orders also support the positive outlook. The company's historical EBITDA growth of around 25-30% annually is expected to continue, with Kotak noting that much of this optimism is already reflected in stock prices.
Kotak expects private companies to capture a larger share of future opportunities, particularly in newer segments such as drones, counter-drone systems and defence electronics. Public sector companies are expected to retain their dominance in areas where they have established capabilities, while private firms are likely to benefit from emerging technologies and product innovation. According to Krishnan, electronics is becoming an increasingly important part of defence platforms across naval, land and air systems, creating fresh opportunities for specialised suppliers. Missile replenishment programmes and potential export demand, especially from Europe, could also support order inflows for private players.
Despite the stock's strong rally over the past few years, Kotak has started coverage on Mazagon Dock Shipbuilders with a 'Sell' rating and fair value of ₹1,950. As reported by Goodreturns, the brokerage believes much of the company's future growth is already reflected in the current valuation, leaving limited upside for investors at existing levels. Similarly, Kotak has assigned a 'Sell' rating to Solar Industries India with a fair value of ₹10,300, citing expensive valuations despite the company's importance in defence and explosives segments. The brokerage has also retained its 'Reduce' rating on Bharat Electronics Ltd (BEL) and 'Reduce' rating on Cochin Shipyard due to current valuation concerns.
According to Kotak Institutional Equities, the long-term outlook for India's defence and aerospace sector remains positive despite current valuation concerns. As reported by Goodreturns, even so, the brokerage believes not every defence stock offers an attractive risk-reward at current valuations. Instead, investors should focus on companies with strong execution, healthy order pipelines and reasonable valuations, with stock selection becoming more important than simply buying any defence company. The brokerage also remains constructive on commercial aerospace suppliers, citing strong order backlogs at global aircraft manufacturers, with Indian component suppliers expected to benefit from increasing outsourcing despite most companies currently operating as tier-one or tier-two vendors.
