Operation Sindoor on the fateful day of 7th May avenged the deaths of Indian civilians. While the Pahalgam terrorist attacks were unfortunate, a silver lining to the dark cloud came from how India’s measured yet effective response helped highlight the country’s enhanced defence capabilities. Precise strikes undertaken on terrorist camps, as well as efficient interception of enemy strikes grabbed headlines, and breathed new life into India’s defence stocks.
In the last one year, Nifty India Defence Index has appreciated by 32%, head and shoulders above the 10% return delivered by the broad market index. But it is important to note that until 6th May 2025, the defence sector was lagging with 6% return versus the 8% return delivered by Nifty 50 index. It is only after Operation Sindoor that the defence index spiked up sharply.
Long-term multibagger
While the latest spike in Nifty India Defence Index came after Operation Sindoor, it should be emphasized that the sector is a long-term multibagger as well. Over the past 5 years, the sectoral index has grown at a massive CAGR of 73%. This is to say that while Sindoor brought back the sector into focus, the foundation stones have been steadily laid down over the years.
Over the last decade or so, India’s focus on defence has grown manifold. Whether we look at the defence budget, production, or exports, policy reforms and public-private partnerships have helped India make a mark in the global defence space.
The numbers speak for themselves. From Rs 2.5 trillion in FY14, India’s defence budget has expanded by 2.5 times to Rs 6.2 trillion in FY25. Defence production has grown from less than Rs 0.5 trillion to Rs 1.75 trillion during the period. And exports have grown more than 10-fold from just about Rs 2,000 crore to Rs 21,000 crore.
Drones in focus
Within defence, Drones have emerged as one of the fastest growing segments in recent years. According to a report by Grand View Research, India’s military drone market generated a revenue of $1.5 billion in 2024. This amounts to less than 4% of the global military drone market.
But following the Pahalgam attack, the government’s defence procurement has accelerated. Indian military drones are expected to register 18% CAGR growth over the next 6 years to achieve the $4 billion milestone by 2030.
Drones have also found applications outside defence. They are rapidly entering areas such as agriculture, logistics, surveillance and inspection, delivery, disaster management, and even entertainment. Regulations are catching up as well, with registration and approval of drones being handled by the Digital Sky Platform.
Pureplay Drone stocks are hard to come by
Drones have recently been hogging investors’ attention. But they still occupy a niche space in India’s stock markets. This is evident from the fact that the largest players in India’s defence sector like Hindustan Aeronautics (HAL) and Bharat Electronics (BEL) do not split out Drones as a separate segment. While other players like Zen Technologies and Paras Defence talk about drones as well as defence-drones in their earnings announcements, they do not spell out their contributions towards revenues or profits.
Paras’ revenues are split about halfway between defence engineering, and optics and optronics with no details provided on drone-specific revenues. Zen Technologies is engaged solely in defence. But once again, the contribution of drones to the current business is not known. The same holds for the large players like HAL and BEL.
IdeaForge is one of the rare pureplay bets on Drones in India today. In partnership with Resonia of the Sterlite group, it designs, develops, and manufactures drones.
Business fundamentals trump pureplay exposure
IdeaForge’s business fundamentals do not inspire confidence. As is typical with most companies supplying to the government, IdeaForge is exposed to fluctuations in execution and cash-flows. More worryingly, however, it has seen steady shrinkage in its order-book.
In FY25, the trend exaggerated as elections and slower government spending shrunk its order-book all the way down to just Rs14 crore. With revenues of Rs 166 crore in FY25, its order-book provides revenue visibility of barely a month. The company also crashed into losses during the year.
This explains why despite a whopping 48% appreciation in its stock-price since Operation Sindoor, IdeaForge is still trading 60% below its price on the listing date. Backed by the hype of an emerging theme, the stock had doubled on its listing date only for business fundamentals to drag it down since then.
Qualitative metrics to lead the way
For diversified companies in the defence sector, performance has been exceptional. Their fundamentals have remained robust, and their long-term returns reflect investor optimism. For Zen Technologies, Paras Defence, HAL, and BEL, the 5-year CAGR return has ranged from 26% to an incredulous 119%.
But of course, their fortunes are tied to a wide range of defence segments rather than being limited to drones alone. This could be due to Drones still being a niche segment that is yet to scale up, or due to the company’s conscious strategy to remain diversified. Either way, investors looking for fundamentally strong drone manufacturers can consider these stocks. But in the absence of hard numbers to lead the way, one would need to base their decisions on qualitative metrics.
The pace of R&D spending, and patent applications and approvals are important monitorables in an emerging theme like Drones. To track progress on research as well as business development, partnerships, agreements, and M&A deals can act as key indicators. Furthermore, if a company derives a sizable portion of its revenues from exports, that typically speaks to the quality of the product. Export revenues also help pick up some of the slack from government dependence. Too much export dependence, however, could leave the business vulnerable to global geopolitical and economic headwinds.
Zen aiming for the sky with Drones
Zen Technologies manufactures defence simulators and anti-drone systems. It began research on anti-drone systems back in 2018, and has gradually emerged as the largest supplier to the Ministry of Defence. Its subsidiary, UTS, has collaborated with DRDO to supply jammers and detectors for anti-drone systems. In fact, Zen’s products helped intercept enemy drones during Operation Sindoor.
It plans to more than triple its revenues to Rs 3,000 crore by FY28, 70% of which is expected from its drone and anti-drone systems. Of course, consolidation of government requirements led to order-win delays in FY25. But the management expects export revenues to pick up pace starting FY27 and eventually scale up to 35% of the business. This should help counteract some of the volatility that comes from dependence on government contracts.
Reflective of this enthusiasm, the stock has appreciated at a CAGR of 119% over the last 5 years. To put it differently, it has more than doubled investor wealth every year on average. It is currently trading at 69 times its earnings, outpacing the 61x multiple for the sector. So, the company’s progress on its lofty growth projections will be critical to support further price appreciation.
Drone stories of diversified defence players
Other defence companies have also indicated renewed focus on drones and related technologies through signed agreements and partnerships. But they have not outlined clear objectives or paths forward.
For instance, Paras Defence and Space has entered into a JV with Israel-based Heven Drones for manufacturing logistics and cargo drones. It has also signed an MOU for drone-manufacturing with Micron Vision of the Rafael group. Paras Aerospace is touted as its “most promising subsidiary,” that is set to become “the most significant company” in the Drones segment.
The biggies, BEL, and HAL, have taken it a step ahead by winning orders in the Drones segment. BEL has operationalized DRDO’s anti-drone systems, and also bagged an anti-drone order worth Rs.572 crore. But this constitutes less than 1% of the company’s total order-book.
The drone startup, Garuda Aerospace, has entered a joint development partnership with an HAL subsidiary, Naini Aerospace Engineering, to manufacture Advanced Precision Drones. It has received pre-booking orders worth Rs.315 crore. But again, the Drones segment is yet to scale with this order amounting to barely 0.2% of its order-book.
Risks remain
Despite strong order books, delays in execution can get in the way of revenue growth. Regulations can also play spoilsport. While the government’s Digital Sky Platform has taken over registration and approval of drones, airspace management and civilian privacy continue to be causes for concern. Additional regulatory burden can come up, leading to affected profitability of players in the Drones space.
Following the Pahalgam attack, India’s defence capabilities and prospects have come into sharp focus. This can draw in competition from new and large players alike. It will have to be seen whether the experience advantage of incumbents helps thwart the anticipated competition.
Furthermore, considering the capital-intensive nature of the business, debt will also need to be closely monitored. Finally, after the recent spike in prices, valuation is one of the key concerns as well. The defence sector is trading at 61 times its earnings, the most expensive it has been in at least 5 years.
Disclaimer
Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. An alumnus of NIT, IIM, and a CFA charter-holder, she pens her views on the economy and stock markets.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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