India’s defence manufacturing story received a fresh boost after the Defence Acquisition Council (DAC) approved capital acquisition proposals worth ₹79,000 crore, prompting Motilal Oswal Financial Services to reaffirm its bullish stance on select defence stocks. The brokerage sees the latest clearance as a structural positive for the sector, particularly for companies with established execution capability and alignment with the armed forces’ indigenisation roadmap.

The DAC’s approval comes amid a sustained push by the government to strengthen domestic defence production and reduce import dependence. With geopolitical uncertainty remaining elevated and India accelerating military modernisation, defence capital expenditure has emerged as a long-term policy priority rather than a cyclical spend.

The latest clearance has taken FY26 year-to-date approvals to approximately ₹3.3 trillion, almost double the annual defence capital outlay of around ₹1.8 trillion. This widening gap between approvals and annual spending underscores the depth of the order pipeline being created for the coming years, even if actual contract awards are staggered.

What is changing

Motilal Oswal believes the sheer scale and breadth of the approvals meaningfully de-risk order inflows for defence companies over a two- to four-year horizon. The approved proposals span a wide range of capabilities, including munitions, missile systems, air defence platforms, surveillance equipment, training systems, and naval assets.

The brokerage has identified four stocks it expects to benefit disproportionately from this pipeline: Bharat Electronics, Hindustan Aeronautics, Bharat Dynamics, and Astra Microwave Products. According to Motilal Oswal, these companies are well positioned due to their existing product portfolios, strong order books, and deep engagement with the armed forces.

However, the brokerage also flags an important nuance. Acceptance of Necessity (AoN) approvals do not automatically translate into immediate orders. The contracting process involves further stages such as tendering, trials, negotiations, and final approvals. Despite this, Motilal Oswal argues that the expanded approval base improves revenue visibility and reduces downside risk to long-term growth assumptions.

Why it matters

For investors, the defence sector has increasingly shifted from being a thematic trade to a structural allocation. The sharp rise in approvals signals continuity in defence spending beyond annual budget cycles, making earnings visibility more predictable for companies with proven execution.

Motilal Oswal notes that public sector undertakings, in particular, stand to gain as a large portion of the approved categories fall within their traditional strengths. At the same time, select private players integrated into the supply chain may also benefit as outsourcing and indigenisation deepen.

The brokerage has assigned the following target prices to its preferred defence picks, reflecting upside potential ranging from low double digits to over 35 percent:

For Bharat Electronics, Motilal Oswal has set a target price of ₹500 against a current market price of ₹393, implying an upside of about 27 percent. Hindustan Aeronautics carries a target of ₹5,800 versus a CMP of ₹4,377, suggesting upside of roughly 32 percent. Bharat Dynamics is seen reaching ₹2,000 from ₹1,473, offering nearly 36 percent upside, while Astra Microwave Products has a target of ₹1,100 compared with its current price of ₹979.

Official views or policy signals

While no fresh policy statement accompanied the DAC clearance, the approvals reinforce the government’s stated intent to prioritise domestic manufacturing, long-term capability building, and supply chain self-reliance. Over recent years, repeated large-scale approvals have signaled that defence spending is now being planned with a multi-year horizon rather than as a stop-start annual exercise.

This policy continuity is critical for defence companies, as it allows capacity expansion, R&D investment, and workforce planning with greater confidence.

Potential business or market implications

From a market perspective, sustained visibility in defence procurement supports premium valuations for companies with execution credibility. Defence stocks have already delivered strong returns over the past few years, leading to concerns around stretched valuations. Motilal Oswal’s note suggests that earnings growth, rather than just rerating, could now drive further upside.

For Indian markets more broadly, a robust defence capex cycle supports industrial manufacturing, electronics, and engineering ecosystems, creating spillover benefits across ancillary suppliers.

Bull vs Bear scenario

The bullish case rests on timely conversion of approvals into executable orders, steady budgetary support, and efficient execution by defence companies. Under this scenario, revenue growth and operating leverage could sustain earnings momentum over the medium term.

The bearish case hinges on delays in contracting, cost overruns, or slower-than-expected budget utilisation. Given that AoNs do not guarantee orders, prolonged slippages could temper investor expectations and compress valuations.

Risk section

Key risks include execution delays, policy shifts in procurement prioritisation, margin pressure from fixed-price contracts, and elevated expectations already priced into some stocks. Additionally, any moderation in defence allocations due to fiscal constraints could impact long-term order flows.