Under the Union Budget 2025, ₹ 6.81 lakh crore has been allocated to the Ministry of Defence. This is a slight 9.53% of the increase from last year’s budget. The Indian defence sector serves as a major pillar in maintaining national security, safeguarding borders, and ensuring regional stability.
What are the possible challenges in the defence sector?
In the defence sector, only ₹ 1.8 lakh crores are allocated to capital expenditure, which is necessary for new equipment for the armed forces, but may not be enough to fulfil defence capabilities.
There is a 14% increase in the allocation for Defence Pension, and if this amount is removed, it could reduce the funds available for other important defence needs. This could put the defence sector at risk of being under-prepared and hinder its ability to modernize effectively.
Also looking at the valuations, major defence stocks as of January 2025 are currently traded at a PE ratio of above 30x. Due to this, current prices may not justify earnings which may lead to correction in the near future.
Also Read: What happened in the Indian stock market today (5th Feb 2025)?
Which are the few best defense stocks?
There are various defence stocks in the market, each of them playing an important role in the sector. Let us take a look at a few of them, focusing on those with a high market capitalisation (as on 6.02.2025):
| Name of Company | Market Cap. (as on 6th Feb 2025) (₹ cr) | 1-year % return | Price to Earnings ratio | Return On Equity |
| Hindustan Aeronautics Ltd | 2,56,134 | 29.41% | 30.3x | 28.90% |
| Bharat Electronics Ltd | 2,10,887 | 59.03% | 42.2x | 24.20% |
| Mazagon Dock Shipbuilders Ltd | 89,276 | 104.50% | 34.7x | 35.20% |
| Cochin Shipyard Ltd | 37,543 | 62.92% | 42.3x | 17.20% |
Hindustan Aeronautics Ltd
Hindustan Aeronautics Ltd (HAL) is one of the largest defence companies in our country, engaged in the manufacturing of defence aircraft and helicopters, as well as handling their repair and maintenance.
| Particulars | Q2FY25 (₹ Cr) | Q2FY24 (₹ Cr) | YoY change (%) |
| Revenues from Operations | 5,977 | 5,636 | 6.05% |
| EBITDA | 1,630 | 1,529 | 6.61% |
| EBITDA Margin (%) | 27% | 27% | – |
| Net Profit | 1,490 | 1,235 | 20.65% |
Key highlights of the company
- The company reported a moderate single-digit revenue growth of 6% for the second quarter, reaching ₹ 5,636 crore.
- The company has a debtor day cycle of 65 days, which is a moderate credit period given to its customers. Any change in this could affect its order inflows and revenue visibility.
- The company’s order book is currently at ₹ 94,000 crore, and the management expects it to increase to ₹ 1,20,000 crore by the end of this financial year.
Bharat Electronics Limited
Bharat Electronics Ltd (BEL) is a key player in India’s defence sector, specializing in the manufacturing and supply of advanced electronic equipment and systems.
| Particulars | Q3FY25 (₹ Cr) | Q3FY24 (₹ Cr) | YoY change (%) |
| Revenues from Operations | 5,771 | 4,162 | 38.66% |
| EBITDA | 1,669 | 1,072 | 55.69% |
| EBITDA Margin (%) | 29% | 26% | 300 bps |
| Net Profit | 1,312 | 860 | 52.56% |
Key highlights of the company
- Revenue for the third quarter was reported at ₹ 5,771 crore, reflecting an overall yearly increase of 38.66%. The net profit stood at ₹1,312 crore, 52.56% higher than the previous year.
- The company’s key projects, such as the Ashwini Radar, Electronic Warfare System for MI-17, HimShakti Phase 4, and QRSAM, are in the final stages of contract approval.
- The order book of the company stands at ₹ 71,100 crore. The management had guided a full-year order inflow of ₹ 25,000 crore, but in the third quarter, the company was only able to convert orders worth ₹ 11,000 crore.
Mazagon Dock Shipbuilders Limited
Mazagon Dock Shipbuilders Limited (MDL) has established itself as a leading shipbuilding company, specializing in the construction of warships, submarines, cargo and passenger vessels, as well as offshore platforms.
| Particulars | Q2FY25 (₹ Cr) | Q2FY24 (₹ Cr) | YoY change (%) |
| Revenues from Operations | 2,757 | 1,828 | 50.82% |
| EBITDA | 511 | 177 | 188.70% |
| EBITDA Margin (%) | 19% | 10% | 900 bps |
| Net Profit | 585 | 333 | 75.68% |
Key highlights of the company
- The company achieved a revenue growth of 50.82% yearly growth for the quarter, with revenue reported at ₹ 2,757 crore. The EBITDA margins improved by 900 basis points, and the net profit was reported at ₹ 585 crore.
- The company is expanding its infrastructure by acquiring 15 acres to develop a shipbuilding and repair facility, including a graving dry dock. Additionally, 40 acres near Nhava Sheva have been secured for constructing large vessels, with plans to build a long dry dock to enhance capacity.
- The company, in collaboration with the Project 75I submarines, is awaiting direction from the government. Currently, 31 ships are being executed, including orders from the Indian Coast Guard and some export orders.
Cochin Shipyard Limited
Cochin Shipyard Limited (CSL) is a key player in defence shipbuilding, specializing in the construction, repair, and refit of various vessels. Its expertise extends to periodic upgrades and life extension programs, ensuring operational efficiency and longevity of ships across multiple categories.
| Particulars | Q2FY25 (₹ Cr) | Q2FY24 (₹ Cr) | YoY change (%) |
| Revenues from Operations | 1,097 | 954 | 14.99% |
| EBITDA | 196 | 195 | 0.51% |
| EBITDA Margin (%) | 18% | 20% | – 200 bps |
| Net Profit | 193 | 191 | 1.05% |
Key highlights of the company
- The company reported a very muted quarter where the revenue grew by 14.99% on a yearly basis and reached ₹ 1,097 crore. The company was profitable with net profit reaching ₹ 193 crore. But, the EBITDA margins fell by 200 basis points.
- The order book of the company is reported at ₹ 22,000 crore and the management expects to execute this with a growth of 20%-25% revenue increase for the full year.
- Further, the company has higher depreciation costs are expected with the commissioning of the ISRF and the new dry dock project. These additional assets will lead to increased depreciation expenses moving forward.
Also Read: How Quarterly Results Influence Stock Prices
Peer analysis
Peer analysis helps to evaluate key players in the defense sector, focusing on their financial ratios and other financial metrics. It highlights their strengths and weaknesses. Further let us take a look at the peer comparison:
| Name of Company | Market Cap. | 1-year % return | Price to Earnings ratio (Ind. Avg: 35-40x) | Good/Bad | Price To Book Value.(Ind. Avg: 8-8.50) | Good/Bad |
| Hindustan Aeronautics Ltd | 2,56,134 | 29.41% | 30.3x | 👎 | 8.22 | 👍 |
| Bharat Electronics Ltd | 2,10,887 | 59.03% | 42.2x | 👍 | 11.55 | 👎 |
| Mazagon Dock Shipbuilders Ltd | 89,276 | 104.50% | 34.7x | 👎 | 12.30 | 👎 |
| Cochin Shipyard Ltd | 37,543 | 62.92% | 42.3x | 👍 | 6.74 | 👍 |
Also Read: Sectors in decline after the 2025 budget
Bottomline
The defence sector may still have strong revenue growth in key companies, but it may face challenges due to limited capital expenditure and high valuations. Overall, the defence sector still remains important for national security, the investors should be cautious due to stretched valuations in the defence sector stocks and potential budget constraints which might affect future growth.
