India’s defence sector is moving into a phase where rising spending, domestic procurement and the move from prototypes to large-scale production are coming together. CLSA said the latest Ministry of Defence annual report supports its long-term view on the sector, with Hindustan Aeronautics, Bharat Electronics and Larsen & Toubro positioned to benefit from different parts of the expanding defence and capital expenditure cycle.
CLSA said the next phase will depend increasingly on execution, supply-chain expansion and the ability of Indian companies to absorb and scale new technologies.
CLSA has assigned an ‘Outperform’ rating to Hindustan Aeronautics and set a target price of Rs 5,481, implying 16.8% upside.
CLSA sees Hindustan Aeronautics as a major beneficiary of the move towards indigenous defence platforms. The brokerage said almost all of HAL’s platform orders currently under execution are of Indian origin, including the Light Combat Aircraft, HTT-40, Light Combat Helicopter, Light Utility Helicopter and Advanced Light Helicopter.
“HAL is a case study of defence Make in India, as all-but-one of its platform orders under execution are of indigenous origin, including LCA, HTT-40, LCH, LUH and ALH. This shifts HAL’s role from licence manufacturer to platform owner and integrator, with greater control over upgrades, lifecycle support and future variants,” CLSA said.
CLSA said HAL’s backlog grew 34% year-on-year in FY26 to Rs 2.5 lakh crore. The brokerage also pointed to the large LCA Mk1A and LCH contracts signed during 2025, saying these orders have substantially increased the company’s long-term revenue visibility.
CLSA expects several growth engines to support HAL’s earnings over the next few years, including its fighter aircraft pipeline, helicopter programmes, engine-related opportunities, aftermarket business and operating leverage. The brokerage expects a 15% EPS CAGR for HAL between FY25 and FY28.
CLSA has assigned an ‘Outperform’ rating to Bharat Electronics and set a target price of Rs 522, implying 35.3% upside.
CLSA said Bharat Electronics is positioned to benefit from the increasing electronics content in defence equipment. The brokerage described BEL as India’s second-largest defence public sector undertaking and a leader in radars, sonars, electronic warfare systems and missile integration.
“Rising electronics in defence equipment and its nomination for two multi-billion dollar projects are key catalysts,” CLSA said.
BEL’s revenue grew 16% to about Rs 27,500 crore in FY26, while its order backlog increased 3% to Rs 73,800 crore, according to CLSA. The brokerage said the company was able to mine its backlog even though the order book was broadly flat during the year.
CLSA also pointed to emergency procurement following the India-Pakistan skirmishes, with contracts worth Rs 31,100 crore. About 68% of these orders were awarded to Indian vendors, according to the brokerage.
CLSA has assigned an ‘Outperform’ rating to Larsen & Toubro and set a target price of Rs 4,842, implying 26.8% upside.
CLSA’s case for Larsen & Toubro is broader than defence alone. The brokerage sees the company as a key beneficiary of the India and Middle East capital expenditure cycle, supported by its diversified engineering and construction portfolio.
“L&T is a key India/Middle East capex cycle play. With its diversified product suites, it enjoys a tailwind of order inflow from the government, private, industrial and the Middle East,” CLSA said.
The brokerage expects double-digit growth in core engineering and construction execution, with margins potentially improving after several years of pressure. It also sees capital reallocation as another potential catalyst for the company.
CLSA said the themes supporting L&T include strong capital expenditure in India and the Middle East, a turnaround in loss-making businesses and capital reallocation aimed at improving return on equity.
CLSA said the government’s procurement strategy is creating a larger domestic addressable market across multiple defence categories. The brokerage pointed to aircraft, helicopters, missiles, radars, artillery, armoured systems, ships, submarines, electronics, propulsion and lifecycle support as areas where Indian companies could see a recurring flow of orders.
Domestic defence production increased 22% year-on-year during the first nine months of FY26, reaching more than Rs 1 lakh crore, according to CLSA. The brokerage also noted that the Indian Army issued all its contracts to Indian players in FY26, compared with 68% in FY22.
CLSA said this greater reliance on Indian suppliers is changing the nature of the opportunity from occasional platform orders to a more regular procurement pipeline.
CLSA said defence capital expenditure has grown at a 9.4% CAGR over the past decade. The share of capital expenditure in the overall defence budget has also recovered to the FY15 level and reached 29.4% in FY27 budget estimates, its highest level in a decade.
The brokerage said defence capital outlay increased to Rs 1.86 lakh crore in FY26 from Rs 1.60 lakh crore and is budgeted at Rs 2.19 lakh crore for FY27. CLSA also noted that capital expenditure rose faster than budgeted in FY26.
CLSA said the Air Force receives the largest share of defence capital expenditure, followed by the Navy and Army. The spending mix supports its view that the move towards indigenous platforms will create opportunities across multiple categories of defence equipment.
CLSA pointed to two major HAL contracts as evidence of the government’s move towards larger indigenous platform orders. The Ministry of Defence signed a Rs 62,400 crore contract with HAL for 97 LCA Mk1A aircraft, while HAL also won a Rs 62,700 crore order for 156 LCH helicopters.
The brokerage said the LCA order alone added about 50% to HAL’s order book and improved its long-term growth visibility.
CLSA expects the company’s market access, integrated design-to-production capabilities, aftermarket operations, net cash position and operating leverage to support its earnings trajectory.
CLSA said emergency procurement after the India-Pakistan skirmishes provided an additional boost to domestic defence suppliers. Contracts worth Rs 31,100 crore were awarded, with Indian vendors receiving about 68% of the value.
The brokerage said BEL’s revenue rose 16% in FY26 to around Rs 27,500 crore as it executed against its backlog. Its order book stood at Rs 73,800 crore at the end of FY26, up from Rs 71,600 crore a year earlier.
CLSA said the combination of rising electronics content and large nomination-based projects provides BEL with additional avenues for growth.
CLSA said around 75% of total defence procurement, equivalent to about Rs 1.61 lakh crore, is planned to be sourced domestically. The brokerage said the Defence Acquisition Council cleared 55 capital acquisition proposals worth Rs 6.73 lakh crore during FY26.
CLSA said this has expanded the addressable market for Indian defence companies across aircraft, helicopters, missiles, radars, artillery, armoured systems, ships, submarines, electronics, propulsion and lifecycle support.
The brokerage said the institutional bridge between prototypes and orders is also strengthening through procurement categories and development-cum-production partner routes.
CLSA said L&T’s diversified business profile gives it exposure to government, private-sector and industrial order inflows as well as projects in the Middle East. The brokerage expects capital expenditure to sustain double-digit growth in core engineering and construction execution.
It also expects margins to expand after four years and sees capital reallocation as an additional catalyst.
CLSA said strong capital expenditure in India and the Middle East, a turnaround in loss-making businesses and efforts to improve return on equity are the key themes supporting its L&T view.
CLSA said the transition from prototypes to mass production is becoming more visible as the government places larger orders for indigenous platforms. The brokerage said this is particularly relevant for HAL, where the company is increasingly moving from a licence manufacturing role towards platform ownership and integration.
The brokerage said the broader defence opportunity is being supported by higher spending, domestic procurement and the development of Indian platforms.
CLSA said the next phase of the sector will place greater importance on execution, supply-chain scaling and technology absorption as large programmes move towards production.
Source CLSA Research, 17 September 2026.
CLSA’s latest report points to a defence sector where higher capital spending, domestic procurement and indigenous platform development are increasingly working together. HAL is benefiting from large aircraft and helicopter programmes, BEL is gaining from the growing electronics content of defence equipment, while L&T has exposure to the broader engineering and capital expenditure cycle.
The brokerage expects the combination to create a larger domestic opportunity as programmes move towards mass production. For companies across the sector, execution, supply-chain expansion and technology absorption are becoming increasingly important as government orders translate into actual production.