India's defence capex seen rising to Rs 2.8 trillion by FY30 on indigenisation, export growth: Kotak

New Delhi: India's defence capital expenditure is projected to grow at an 11 percent compound annual growth rate (CAGR) over FY2026-30E to reach Rs 2.8 trillion. This structural upcycle is supported by policy measures like positive indigenisation lists and the Defence Acquisition Procedure 2020, which mandate more than 50 percent indigenous content.

According to a report by Kotak Institutional Equities, Indian defence exports grew 50X over the past decade, driven by cost-competitive indigenous platforms, proven combat performance in Operation Sindoor, and the easing of export controls.

While the US remains the largest destination, Europe and Armenia are emerging as key new geographies. The report highlighted that "the Rs 500 bn target by FY2029 is the next key milestone," up from Rs 384 billion in FY26.


Technological advancements are also altering spending patterns. Drones are fundamentally transforming warfare economics, with the global military drone market standing at approximately USD 30 billion in CY24. The market is likely to reach USD 75 billion by 2029.

"We estimate India will spend USD 25-30 bn on drones and USD 4-5 bn on counter-drone systems over the next decade," the report added.

As per the report, global military spending surged from USD 600-700 billion in the 1990s to USD 2.7 trillion in CY24. Sweden-based think tank SIPRI forecasts this figure to touch USD 6.6 trillion by 2035. India currently ranks as the fifth-largest military spender globally at USD 84 billion.

The report noted that the country faces an urgent need to scale up defence spending to modernise ageing infrastructure and counter the growing military spending of neighbouring countries.

"AoN [Acceptance of Necessity] approvals have surged ~10X over FY2021-26, implying Rs 6.5-7 tn in new orders during FY2027-29E," the report stated.

The brokerage firm highlighted that the domestic procurement share rose from 54 percent in FY19 to over 70 percent. This shifting dynamic positions domestic defence manufacturers to benefit from rising geopolitical tensions, accelerating modernisation programs, and expanding export opportunities.

Financially, Indian defence companies trade at a 50 percent valuation premium over global peers, operating at a 50X 1-year forward price-to-earnings (P/E) multiple versus 28X globally. This premium factors in faster projected growth, with a revenue CAGR of 26 percent compared to the global average of 11 percent.

During FY21-26, domestic manufacturers delivered a 25 percent revenue CAGR, while EBITDA margins expanded by 500 basis points to roughly 25 percent.

The report mentioned that when adjusted for lower research and development spend, the margin advantage versus global peers narrows from 800 basis points to around 450 basis points.