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Defence Sector: Time to be selective

ICICIdirect Research 06 Jun 2025 DISCLAIMER

Defence sector remained in focus and gained significant attention among investors again over the last couple of months. Almost all the defence stocks have seen notable gains in the range of 40-90% in the last three months

After the recent conflict between Indian & Pakistan, government has planned emergency procurement worth additional Rs 40000 crore. Defence secretary has also emphasized that there is a need of increasing India’s defence budget to 2.5% of GDP by FY30 (from 1.9% of GDP at present). Moreover, capital outlay should reach to 0.8% of GDP by FY30 (from 0.5% at present). We believe that this would create cumulative domestic procurement opportunity of Rs 7-8 lakh crore over the next 5 years

On the valuations front, all the defence companies have already seen some further re-rating in the last 2-3 months (average P/E of sector is at 48x on FY27E EPS). However, we believe that few companies like Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Midhani and Astra Microwave seem to be better placed with strong growth expected in the coming period and valuations are relatively lower

We have a target price of 6100 on HAL, which is currently trading at 33x P/E on FY27E. On BEL (trading at 38x P/E), we have a target price of 430. On Midhani (trading at 36x P/E), we have a target price of 530. On Astra Microwave (trading at 45x P/E), we have a target price of 1270

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