Hindustan Aeronautics (Buy call), involved in combat aircraft manufacturing, offers the highest upside potential among the four stocks. With a CMP of Rs 3,989 and a target price of Rs 5,500, the stock implies a potential upside of about 37.9%. Bharat Dynamics (Buy call) also shows strong return potential, with its target of Rs 1,800 indicating an upside of roughly 34.7% from the CMP of Rs 1,336.
Meanwhile, Bharat Electronics, currently trading at Rs 458, has a target price of Rs 520, suggesting a more modest upside of around 13.5%. Astra Microwave Products too offers moderate gains, with a CMP of Rs 1,008 and a target of Rs 1,150, translating into an upside potential of about 14.1%.
Here are 4 reasons behind the bullish view:
1.) War to prompt spending – Escalating geopolitical tensions in the Middle East could drive a surge in global defence spending and demand for military equipment such as missiles, air-defence systems, surveillance technologies, and electronic warfare solutions, analysts added. In FY25, the Middle East accounted for 26% of total global arms imports and this can increase further, thereby opening up opportunities for domestic defence companies to capture this market.
Along with this, the earlier NATO directive to member nations to increase defence capex allocation and higher budgetary allocation for defence by the Indian government bode well for increasing the TAM for domestic defence companies. “We expect companies like Bharat Electronics, Bharat Dynamics, Solar Industries, Astra Microwave and Zen to benefit from a higher TAM.”
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2.) Defence boost in Budget – The Union Budget increased the capital outlay on defence by 18% YoY to Rs2.2 lakh crore in FY27BE. This increase is important as it provides the necessary funding visibility to support the large pipeline of Acceptance of Necessity (AoN) approvals cleared YTD in FY26. So far, AoNs worth over Rs 7 lakh crore have been approved across multiple platforms and systems, creating a strong procurement pipeline for the domestic defence industry.
“These approvals typically translate into tenders, contract awards, and execution over the next 2-2.5 years, implying a steady flow of order inflows for defence manufacturers,” the brokerage said.3.) DAP 2026 to support companies – The government has introduced an updated Defence Acquisition Procedure (DAP) 2026 aimed at strengthening domestic defence manufacturing and promoting deeper indigenisation. The revised framework marks a shift in focus from the earlier “Made in India” approach to “Owned by India”, emphasising greater domestic control over defence technologies and systems.
One of the key changes is the simplification of procurement categories, which have been reduced from five to four. This is expected to streamline decision making and help accelerate acquisition timelines. The government has also strengthened indigenisation norms by increasing the minimum indigenous content requirement in the ‘Buy (Indian–IDDM)’ category from 50% to 60%.
4.) Strong order inflows – Defence PSUs have entered the final stretch of FY26 with strong year-to-date order inflows. Bharat Electronics, Hindustan Aeronautics and Bharat Dynamics have secured capital contracts worth Rs 20,600 crore, Rs 69,400 crore and Rs 5,400 crore, respectively, highlighting strong demand across key defence platforms.
Ordering momentum has also improved for private defence players during FY26. Astra Microwave has continued to see steady inflows in its defence segment, receiving orders worth Rs 290 crore in the third quarter of FY26.
Meanwhile, Zen Technologies has seen a revival in order inflows in the same quarter, securing contracts worth Rs 600 crore. The company also received additional orders worth Rs 350 crore in January 2026 and is expected to bag a simulator order worth Rs 600 crore before the end of FY26.
Key risk
India remains heavily reliant on Israel for several critical defence components, with the country accounting for nearly half of India’s imports of air defence systems and sensors. A large portion of India’s purchases from Israel is concentrated in advanced components and platforms used in missiles, loitering ammunition and precision strike weapons, as well as air defence systems and sensors for radar and optical systems.
As a result, any prolonged conflict in the Middle East could disrupt supply chains for these critical components, potentially affecting defence procurement and production timelines.
Stock valuations
Bharat Electronics is currently trading at 46.9x and 40.0x its FY27E and FY28E earnings, respectively. The brokerage has maintained its estimates and reiterated a Buy rating on the stock with an unchanged target price of Rs 520, based on 45x two-year forward earnings.
Hindustan Aeronautics is trading at 26.2x and 21.2x FY27E and FY28E EPS, respectively. Estimates have been maintained and the Buy rating reiterated with an unchanged target price of Rs 5,500, based on the average of DCF and 30x two-year forward earnings.
Bharat Dynamics is currently trading at 42.5x and 29.8x FY27E and FY28E EPS. The brokerage has maintained its estimates and reiterated a Buy rating on the stock with an unchanged target price of Rs 1,800, based on 42x two-year forward earnings.
Astra Microwave Products is trading at 42.6x and 33.4x FY27E and FY28E EPS. The brokerage has maintained its estimates and reiterated a Buy rating with an unchanged target price of Rs 1,150, based on 38x two-year forward earnings.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)