Union Budget FY27: Defence budget set to soar, Jefferies says betting on HAL, BEL and Data Patterns

India’s upcoming Union Budget is shaping up as a critical inflection point for defence stocks, with capital spending expected to rise more than 10% year on year and extend a multi-year push towards indigenisation that has already translated into record orders and rising exports. Jefferies says the clearest way to play the theme is Hindustan Aeronautics Ltd (HAL), its top pick, followed by Bharat Electronics Ltd (BEL) and Data Patterns (India).

That is the central takeaway from Jefferies’ latest India defence monthly report, released ahead of the February 1 Budget, which frames FY27 as a continuation, and possible acceleration, of India’s rearmament cycle. “HAL is our top pick followed by BEL and Data Patterns,” the brokerage said, citing rising capital allocations, strong execution and growing export optionality.

Capex momentum holds

Defence capital expenditure will be the key monitorable for markets in the coming Budget. Rs 1.8 trillion was allocated for defence capex in the FY26 budget estimate, of which 62% had already been spent in April-November 2025, well ahead of the 41-54% pace seen in the same period over FY21-FY24. While monthly spending fell 13% year on year in November 2025, cumulative capex for April-November was still up 57% year on year, versus FY26E budgeted growth of 13%.

Jefferies said the Defence Secretary has recently indicated the potential for a 20% increase in the FY27 defence budget to maintain operational readiness and support self-reliance amid persistent global tensions. The Ministry of Defence has also discussed a possible 17-18% compound annual growth rate in capital spending over the coming years, with an aim to lift overall defence outlays to about 2.5% of GDP from under 2% currently.

Exports and diplomacy add a second engine

India’s defence story is no longer just domestic. Jefferies noted that year-to-date defence exports have already reached 87% of the USD 3.3 billion FY26 target, reflecting growing international traction. India is targeting defence exports of Rs 500 billion by FY30, more than doubling from Rs 236 billion in FY25.

Proposed strategic and trade initiatives could widen the funnel. A potential India-EU free trade agreement may include a Security and Defence Partnership, opening the door for Indian firms to participate in the EU’s EUR 150 billion SAFE programme. India has also signed a Letter of Intent with the UAE in January 2026 to establish a Strategic Defence Partnership, while defence officials have stepped up engagement with counterparts across Japan, Africa, Italy and the UK. Media reports indicate rising interest from the Middle East and Asia in Indian platforms such as BrahMos and Akash missiles, Pinaka rockets and artillery systems.

Orders in hand, visibility ahead

Order momentum remains robust. The Ministry of Defence signed contracts worth USD 23 billion in FY25, a record and roughly twice the previous high, with 87% of that already achieved in the first nine months of FY26. In addition, the government cleared acceptance of necessity for USD 90 billion worth of capital acquisitions in calendar years 2024-25, largely focused on domestic procurement, giving medium-term visibility as approvals typically convert to contracts over up to two years.

BEL, Jefferies noted, has indicated in its latest earnings call that it expects to receive a USD 3 billion-plus QRSAM order by the fourth quarter of FY26.

Why HAL, BEL and Data Patterns?

Jefferies expects the indigenisation drive to sustain double-digit growth for leading domestic players. HAL’s share of domestic defence capital expenditure is projected to rise to more than 25% as deliveries of domestically manufactured aircraft accelerate. BEL has steadily increased its share of defence capex, benefiting from electronics-led indigenisation, while Data Patterns’ domestic defence revenue has grown at a 31% CAGR over FY19-FY25, far outpacing the broader rise in capital spending.

The brokerage expects HAL, BEL and Data Patterns to deliver double-digit earnings CAGR over the medium term, backed by strong order books and healthy returns on equity and capital employed, positioning them as prime beneficiaries if the Budget delivers what defence bulls are betting on.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)