Key Highlights

 

• India's Defence Supercycle is underway: 75% of defence capital procurement is now reserved for domestic sourcing under Atmanirbhar Bharat. Indigenous defence production reached a record ~₹1.78 lakh crore in FY 2025-26.                                                                                                                                                                                                      
• Deep-Tech is the next growth engine: AI, Drones & Counter-Drone Systems, Electronic Warfare, Radar & Missile Electronics, Cybersecurity, Space Technologies, and Semiconductors & Mission-Critical Electronics offer superior long-term value creation.                                                                                                
• Drones represent a structural opportunity: Large-scale domestic procurement programs (>₹20,000 crore) and rapid technological advancement across all three services. Counter-drone systems are emerging as a major adjacent growth segment.                                                                                                                  
• Defence exports continue to scale: Supported by technology partnerships, competitive offerings, and policy push. Private sector contribution is rising meaningfully.

                                           

1. India's Defence Supercycle is Underway

 

India's defence sector is experiencing a multi-year structural upcycle supported by strong policy tailwinds, rising budgetary allocations for modernization, and a clear strategic push for self-reliance.

 

Policy & Indigenization Momentum

 

• 75% of defence capital procurement is now reserved for domestic sourcing — a significant increase from historical levels and a clear signal of sustained demand for Indian manufacturers and technology providers.                                                                                                                                                      
• Atmanirbhar Bharat continues to accelerate localization across the entire defence ecosystem — from platforms and subsystems to components and software.                                                                                                                                              
• The focus is gradually shifting from platform manufacturing to ownership of technology and intellectual property (IP). This creates opportunities for companies that invest in R&D, design capabilities, and proprietary systems.                                                                                                                                            

Record Production & Growth Trajectory

 

Indigenous defence production has grown dramatically. According to Ministry of Defence data, production rose from ₹46,429 crore in 2014–15 to approximately ₹1.78 lakh crore in FY 2025-26 — representing roughly a 4x increase over the decade, with strong double-digit growth continuing in recent years. The private sector's share has also risen steadily (contributing ~24% in the latest fiscal), reflecting successful policy efforts to broaden the industrial base.

 

Defence Sector Key Metrics (₹ Crore)

 

 

2. Deep-Tech Will Drive the Next Phase of Growth

 

The biggest opportunities are expected to emerge in technology-intensive domains. Technology-led companies with strong R&D capabilities and proprietary IP are positioned to capture disproportionate value as the sector moves beyond platforms toward integrated, software-defined, and autonomous systems.

 

Priority Deep-Tech Segments

 

• Artificial Intelligence (AI) & Autonomous Systems: AI-enabled command & control, decision support, predictive maintenance, and swarm intelligence for drones and unmanned systems.

    

• Drones & Counter-Drone Systems: One of the most visible and fastest-moving segments (detailed below).                                                                                                                                    
• Electronic Warfare (EW) & Radar/Missile Electronics: Critical for survivability and dominance in contested electromagnetic environments. Includes jammers, ESM/ELINT, radar payloads, and software-defined EW.                                                                                                                                                      
• Cybersecurity & C4ISR: Secure communications, resilient networks, and integrated battle-space management systems.                                                                  
• Space Technologies: Satellite communications, ISR constellations, space situational awareness, and launch capabilities supporting defence needs.                     

 

• Semiconductors & Mission-Critical Electronics: Indigenous development of high-reliability chips, sensors, RF components, and embedded systems to reduce import dependence.                                                                                                                                                                                                               

Government initiatives such as the ADITI scheme are accelerating development of approximately 30 deep-tech critical and strategic technologies by 2026, providing additional tailwinds for capable private and public sector players. 

 

3. Drones – A Structural Growth Opportunity

 

The domestic defence drone market is expected to witness significant expansion over the coming years, supported by higher procurement, rapid technological advancements, and increasing deployment across all defence services. Counter-drone systems are also expected to become a major growth segment.                                

Recent developments underscore the scale: The Ministry of Defence is preparing one of India's largest drone procurement programs yet, with plans for over ₹20,000 crore worth of domestically manufactured military drones. This includes UAVs for surveillance, logistics, loitering munitions, and heavy-lift platforms, alongside counter-UAS (C-UAS) systems to neutralize adversarial drone threats.                                                                                                                                                                             

The global anti-drone / counter-UAS market is projected to grow at a CAGR of ~25% through 2030-33, reaching USD 16-20 billion. India's share is expanding rapidly due to border security needs, infrastructure protection, and integration of layered C-UAS into air defence architectures. Indian firms (both DPSUs like BEL and private innovators) are securing contracts and developing indigenous solutions ranging from RF/jammer-based systems to directed-energy and kinetic interceptors.                    

 

Companies with capabilities in AI-enabled autonomy, swarm coordination, heavy-lift logistics, composite airframes, and integrated EW resilience are particularly well-positioned. The segment rewards rapid iteration, proven field performance, and the ability to scale production while meeting stringent military standards.

 

4. Electronics Becoming the "Brain" of Modern Warfare

 

Modern defence systems are increasingly dependent on advanced electronics, software-defined systems, AI-enabled command & control, sensors, and communication technologies. Companies with deep capabilities in these areas are expected to benefit meaningfully as platforms become more networked, autonomous, and sensor-fused.

 

Recent milestones illustrate the progress: In June 2026, the Netra Mk-1 AEW&C system (mounted on Embraer jets) received Final Operational Clearance, providing 240-degree radar coverage up to 375 km and serving as a flying command center. This indigenous capability enhances situational awareness and drone detection while reducing reliance on foreign AWACS platforms. Upgrades (Mk-1A) and follow-on Mk-2 programs on Airbus A321 platforms are already in planning.

 

The shift toward software-defined radars, cognitive electronic warfare, integrated battle management systems, and resilient datalinks creates durable moats for firms with strong systems integration skills, proprietary algorithms, and proven reliability in harsh environments. Electronics content per platform is rising steadily, expanding the addressable opportunity even for existing programs.

 

5. Defence Exports Continue to Gain Momentum

 

Indian defence manufacturers are steadily expanding their global presence through technology partnerships, localization initiatives, and competitive product offerings. Export growth is expected to remain an important long-term driver for the sector.

 

Defence exports have grown dramatically from ₹686 crore in FY 2013-14 to over ₹23,600 crore in FY 2024-25. While still a small fraction of global trade, the trajectory is strong, with private sector companies often more agile in securing international orders. Government targets include further scaling toward ₹50,000 crore by 2030. Key markets span Asia, Africa, Latin America, and select Western partners for components and sub-systems.

 

Export success increasingly depends on demonstrated performance (combat-proven where possible), competitive pricing, technology transfer willingness, and after-sales support infrastructure. Companies that combine strong domestic order books with export credentials enjoy both revenue diversification and credibility advantages.

 

Research View & Investment Framework

 

Our key takeaway is that the Indian defence opportunity is no longer limited to traditional manufacturing. The next phase of value creation will be led by companies focused on technology, innovation, proprietary IP, and advanced engineering capabilities.

 

We recommend remaining focused on businesses with:

 

• Strong order visibility and a healthy pipeline of executable programs
• Consistent and increasing R&D investments with clear IP generation
• Proprietary technologies and defensible moats (not easily replicable)
• High indigenization levels and alignment with "Make in India" priorities
• Growing export potential and demonstrated international competitiveness
• Healthy execution capabilities, delivery track record, and scalable manufacturing.

 

Key Risks & Considerations

 

• Execution & Technology Risk: Complex deep-tech programs (especially AI autonomy, advanced EW, and indigenous semiconductors) carry development and integration risks; delays are common in defence.                                                                                                                                                                             
• Supply Chain & Component Dependence: Advanced electronics, RF components, and high-end semiconductors still rely on global (often concentrated) supply chains; geopolitical disruptions can impact timelines and costs.                                                                                                                                                      
• Valuation & Sentiment: Defence stocks have rerated significantly on strong narratives; any disappointment in order wins, margins, or macro defence spending could lead to de-rating.                                                                                 
• Policy & Budgetary: While current momentum is strong, changes in procurement priorities, budget allocations, or indigenization targets could affect specific sub-sectors.                                                                                                                                             
• Export & Geopolitical: Export growth depends on end-user approvals, technology transfer policies, and competitive positioning vs. established global players.

 

Conclusion

 

The Indian defence sector stands at an inflection point. The combination of sustained policy support, record domestic production, accelerating indigenization, and the rise of deep-tech capabilities creates a multi-year structural growth story. While platform manufacturing remains important, the companies that master technology ownership, IP creation, systems integration, and rapid innovation will likely deliver superior outcomes for investors over the long term.

 

 

Warm regards,

 

Arijeet Dutta | Neeru Seal

Senior Research Analyst | Partner

 

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