Unlocking Potential: How the Rs 54,000 Crore Defence Budget Boosts Growth and Projections

The recent endorsement by the Defence Acquisition Council (DAC) for capital acquisition proposals totaling ₹54,000 crore is a significant development for India’s defense sector. According to a report from ICICI Securities, this move is expected to rejuvenate order placements and Acceptance of Necessity (AoN) approvals as we approach the end of Q4 FY25. The anticipated reforms in the capital acquisition process could enhance overall performance in FY26, provided they are implemented effectively.

Key Proposals Approved by DAC

In a significant move, the Ministry of Defence has made public three key proposals that have received AoN:

Indian Army: The DAC has approved the acquisition of 1,350 HP Engines to upgrade the existing 1,000 HP Engines for T-90 Tanks. This enhancement is expected to improve these tanks’ battlefield mobility, especially in high-altitude regions, by optimizing their power-to-weight ratio.
Indian Navy: The DAC has also granted AoN for the procurement of Varunastra Torpedoes. Developed by the Naval Science & Technological Laboratory, these ship-launched anti-submarine torpedoes are a testament to India’s growing capabilities in indigenous defense technology.
Indian Air Force: The approval for Airborne Early Warning & Control (AEW&C) Aircraft Systems marks another crucial step. These systems significantly bolster combat capabilities and transform the operational landscape, as highlighted by the Ministry of Defence.

ICICI Securities further pointed out that Bharat Electronics Limited (BEL) stands to gain from these developments, which may positively affect related firms in the radar technology sector, such as Astra Microwave. To date in FY25, AoNs worth ₹2.5 trillion have been issued, a slight decrease compared to ₹3.53 trillion in FY24 and ₹2.6 trillion in FY23.

Streamlining the Capital Acquisition Process

The DAC’s recent approval includes new guidelines aimed at expediting the capital acquisition process. The goal is to reduce the average acquisition timeline from 96 weeks (two years) to just 24 weeks (six months).

Key changes include:

Concurrent preparation of the Request for Proposal (RFP) alongside AoN requests.
Conducting Field Evaluation Trials under simulated environments rather than just extreme conditions, which could lead to an increased demand for advanced simulators.
A new timeline of six months for the Contract Negotiation Committee (CNC) to finalize pricing with suppliers.

ICICI Securities emphasized that these reforms could significantly enhance defense readiness and alleviate investor concerns regarding delays in contract awards.

Future Outlook

ICICI Securities views the approved reforms as a timely relief, especially given recent order delays that have raised investor apprehensions. Major upcoming contracts, including those for Rafale-N, Predator drones, and additional Scorpene-class submarines, are expected to be awarded in the next few years. The streamlined timelines could be pivotal in restoring investor confidence.

Moreover, media reports indicate that the Cabinet Committee on Security (CCS) has also sanctioned the procurement of indigenous ATAGS valued at ₹70 billion. With an uptick in AoN approvals and a more efficient acquisition process, FY26 is poised to be an exciting year for the defense industry.

ICICI Securities recommends several stocks in the sector, including Solar Industries (BUY; Target Price: ₹13,720), PTC Industries (BUY; Target Price: ₹20,070), and Azad Engineering (BUY; Target Price: ₹2,350). Additionally, they believe that the current AoN will be beneficial for BDL (Target Price: ₹1,400), BEL (Target Price: ₹350), and Astra Microwave (Target Price: ₹935), all rated as buy options.