Will Defence PSUs Achieve 18% Growth as India Strengthens Its Armed Forces?

Mumbai, June 2 (NationPress) India intends to gradually boost its defence budget as a share of GDP from approximately 2% currently to somewhere between 3% and 4% within the next decade, as highlighted in a report from Omniscience Capital released on Monday.

With a $10 trillion GDP, the defence budget is anticipated to exceed $300 billion, translating to around Rs 30 lakh crore. This suggests an annualized growth rate of 16-17% until 2035, according to the report.

The overall output of the defence PSUs is projected to double to Rs 1.8 lakh crore by 2029, reflecting an 18% growth over the next four years.

The report further emphasizes that Operation Sindoor has ignited a renewed emphasis on defence, vigilance, and strategic readiness to combat threats and protect not only our borders and citizens but also vital resources, economic infrastructure, and the digital landscape.

As per the findings, the mid-term target for domestic defence production is set at Rs 3 lakh crore by 2029. In FY25, domestic defence production surpassed Rs 1.4 lakh crore, with 78% contributed by defence PSUs, amounting to approximately Rs 1.1 lakh crore. The listed defence PSUs accounted for over Rs 90,000 crore of this, constituting 66% of the total defence PSUs' share.

The growth projection is further supported by analyst estimates for the coming years. The overall turnover of eight listed defence PSUs is expected to grow by 18% in FY26 and by 22% in FY27. Moreover, nine unlisted defence PSUs are anticipated to report a combined turnover exceeding Rs 20,000 crore in FY26, as detailed in the report.

In the long run, defence pensions, which currently comprise about 25% of the total defence budget and represent the largest expense under the salary category (around Rs 2 lakh crore), are expected to grow at a slower rate. The anticipated annual growth of the capital budget and supplies is predicted to exceed 20%. The cumulative capital expenditure over the next decade could range from Rs 50 lakh crore (at 2.4% in 2035) to Rs 64 lakh crore (at 3% in 2035).

There is also an expectation that the Rs 3 lakh crore target for domestic defence production by 2029 might be revised upwards and surpassed.

The report indicates that while the growth potential in the defence sector is undeniably strong, the TAM (total addressable market) is extensive, and growth rates are likely to remain elevated for decades.

However, investors should remain vigilant regarding valuations. The median trailing price-to-earnings (P/E) ratio of the eight listed DPSUs stands at 57. The projected median P/E for FY26 and FY27 is 45 and 36, respectively, suggesting that the potential for high growth is already reflected in the pricing. For some private sector firms, the multiples are even higher, and thus, investors are advised to exercise caution in capital allocation to specific entities at current valuations.