Defence stocks (AI image)

By Yellapu SantoshBudget 2026: We expect an inflection in India’s upcoming defence budget cycle, with core message being, capital outlay likely to grow faster than the overall defence budget, and the incremental funding would be channeled toward domestic procurement and modernisation-heavy programmes. The Defence Secretary in a FICCI forum recently highlighted that the Ministry of Defence (MoD) is asking for a ~20% increase in capital acquisition budget for FY27e, described as the steepest single-year jump, explicitly prioritising domestic procurement.MoD has walked its talk by ensuring that majority of the domestic procurement is driven by DPSU’s + private players (YTD procurement from domestic players account for more than 65-70% threshold levels) rather than depending on imports.In parallel, the budget mechanics increasingly matter as much as the topline. Parliamentary scrutiny has highlighted that “Committed Liabilities” (payments due in a year for contracts signed earlier) take first charge on capital allocation, while “New Schemes” are fresh projects likely to be approved and contracted during the year, yet both are funded from the same Capital Acquisition (Modernisation) head. This is important because when committed liabilities are high, they “crowd out” new contracting even in a growing budget. Conversely, if MoD meaningfully raises the capital pool, then the system can service committed liabilities and accelerate new orders. If one looks at the funnel of projects that got cleared by the Defense Acquisition Council (DAC) in last 2-4 years, it reinforces our view that capital outlay will be on an increasing trend (and is often a key swing factor at the RE stage) and remains the principal lever for modernisation outcome.Who would get most of the highest allocation? Like previous years, expect the Indian Air Force (IAF) to get the highest allocation, followed by Indian Navy (IN).What does this mean for awarding in the next 12-24 months cycle? If the “capital-heavy + domestic-first” posture holds, then the awarding pipeline should be broad-based across the platforms, munitions, network-centric capabilities. Expect the biggest contracting momentum in (1) aircraft and helicopter fleets, (2) missiles/ rockets/ ammunition, (3) C4ISR / EW / space-enabled ISR, and (4) drones and counter-drone systems, segments where India has both urgency and growing domestic industrial base.On the aviation side, likely contracting themes include, sustainment-linked packages around fighter induction and upgrades, including LCA-related procurement (fighters, spares, support), aircraft/engine upgrade work, and rotary-wing inductions for Indian Army/ IAF/ IN (where indigenous content is rising). Given the urgency, won’t be surprised if awarding of the 114 Rafale order also forms part of the ‘New Schemes’ in FY27.On the missile and munitions side, the budget thrust should continue to favor scale orders for guided rockets, long-range rockets, air defence missiles, precision munitions, loitering munitions, and artillery ammunition, because these deliver immediate combat power, have relatively faster contracting cycles than major platforms, and fit the indigenisation narrative.From the IN point of view, while large shipbuilding programmes are multi-year and heavily “committed-liability” dominated, capital uplift can still translate into steady awards for P-75 (I) Submarine order, further platform upgrades, sensors, weapons fits, select new-build approvals.A particularly important “budget-to-orders” bridge in this cycle would be ISR and network-centric warfare. With contested borders, maritime chokepoints, and the need for rapid kill-chains, India is likely to keep prioritising C4ISR projects, covering satcom, surveillance satellites, ISTAR/ AEW&C enabling systems, tactical communications, electronic warfare, and secure data links, because these are force multipliers and align with domestic electronics and systems champions.The committed-liabilities framework supports this outlook as the big-ticket platform contracts (aircraft, ships) create multi-year payment obligations, MoD will typically seek a portfolio of “new schemes” that are modular, scalable, and can be ramped based on annual headroom, precisely how many ISR, EW, and drone programmes are structured. In short, implied signal of a higher capital allocation (and explicit emphasis on domestic procurement) makes it more plausible that multiple mid-to-large awards can be run in parallel, rather than serially queued behind legacy commitments.On the whole, the upcoming Indian defence budget outlook, would see “capital step-up” with at least a 15% increase. Where the structural reality of committed liabilities, would support of a multi-year award cycle, where the largest, fastest beneficiaries may likely be seen in missiles/ munitions, defence electronics (C4ISR/ EW), drones/ C-UAS, and select aviation/ helicopter procurement and upgrade packages, with shipbuilding likely to remain steady, constrained by long-duration payment schedules.

Budget 2026: Defence stocks in focus

Solar Industries India Ltd

Bharat Electronics Limited (BEL)

Hindustan Aeronautics Limited (HAL)

Mazagaon Dock Shipbuilders Limited (MDL)

(Yellapu Santosh is Research Analyst, Anand Rathi Institutional Equities)(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)