Defence PSUs likely to clock 18 pc growth as India beefs up armed forces

Mumbai, June 2 India will gradually increase its defence budget as a percentage of GDP from around 2 per cent at present to 3 per cent or even 4 per cent over the next decade, according to a report released by Omniscience Capital on Monday.

With a $10 trillion GDP, the defence budget is expected to grow to more than $300 bn or around Rs 30 lakh crore. This implies a 16-17 per cent annualised growth till 2035, the report observes.

The total output of the defence PSUs is expected to double to Rs 1.8 lakh crore by 2029, indicating a growth of 18 per cent over the next four years, according to the report.

The report further states that Operation Sindoor has triggered a renewed focus on defence, vigilance, and strategic preparedness to attack enemies and safeguard not only our borders and citizens but also the critical resources, economic and trade infrastructure, and the digital ecosystem.

As per the report, the mid-term target for domestic defence production is set at Rs 3 lakh crore by 2029. In FY25, domestic defence production crossed Rs 1.4 lakh crore, of which 78 per cent was contributed by the defence PSUs at around Rs 1.1 lakh crore. The listed defence PSUs accounted for more than Rs 90,000 crore of this, accounting for 66 per cent of the total defence PSUs' share.

This growth outlook gets revalidated if one looks at the analyst estimates for the next couple of years. The total turnover of 8 listed defence PSUs is expected to grow at 18 per cent and 22 per cent for FY26 and FY27, respectively. Nine unlisted defence PSUs combined are expected to report a total turnover in excess of Rs 20,000 crore in FY26, according to the report.

According to the report, in the long term, the defence pensions, which account for around 25 per cent of the total defence budget, currently, and the largest part of the expense under the salary head (currently around Rs 2 lakh crore), are expected to grow at a slower pace. The expected annualised growth of the capital budget and supplies would be even higher, potentially at levels above 20 per cent. The cumulative capex over the next 10 years could range from Rs 50 lakh crore (at 2.4 per cent in 2035) to Rs 64 lakh crore (at 3 per cent in 2035).

It also expects the Rs 3 lakh crore domestic defence production target for 2029 announced earlier might be revised upward and exceeded.

The report notes that while the growth potential of the defence sector is unmistakably robust, the TAM (total addressable market) is large, and the growth rates are likely to remain high for decades.

However, the investors need to pay attention to the valuations. The median trailing price to earnings (P/E) multiple of the 8 listed DPSUs is 57. The forward median P/E for FY26 and FY27 is at 45 and 36, indicating that the high growth potential is significantly priced in. For some of the private sector names, the multiples are even higher, and hence, investors are advised to be extremely cautious while allocating capital to specific names at current levels.

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