HAL, BEL emerge as top defence picks, use near-term volatility to accumulate: Choice

India's defence manufacturing sector is undergoing a significant transformation, driven by strong government support, growing execution capabilities and a clearly defined long-term policy roadmap. According to Choice Institutional Equities, the upcoming Q1FY26 earnings season is expected to reinforce this trend, with major players like Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) likely to showcase resilient performance and execution strength across the value chain.

"We remain structurally positive on India's defence ecosystem," said Choice Institutional Equities in its latest report released on Wednesday. "Backed by policy visibility and robust order flows, companies are transitioning from domestic suppliers to strategic global partners. HAL and BEL remain our top picks given their scale, execution record and strategic importance in India's evolving defence landscape."

For HAL, Choice expects a 23.9 per cent year-on-year (YoY) growth in sales, supported by the steady execution of large defence platform orders, particularly in fighter aircraft and helicopters. The brokerage anticipates a 50 basis points (bps) expansion in EBITDA margin to 23.3 per cent, aided by better absorption of fixed costs and operating leverage. However, net profit is likely to remain flat due to higher depreciation and tax expenses.

BEL, on the other hand, is projected to report a 19 per cent decline in sales on a high base and seasonally lumpy order execution. Despite the top-line pressure, EBITDA margins are expected to stay stable at 22.3 per cent, helped by a favourable product mix and cost control. PAT (Profit after tax) is seen falling 17 per cent YoY, largely in line with the sales decline.

The broader sector outlook remains upbeat. Indian defence exports have seen a 10-fold increase over the last decade, crossing Rs 21,000 crore in FY25. The government is targeting Rs 50,000 crore in defence exports by 2029. This surge reflects the growing integration of Indian firms into global supply chains, with increasing collaborations with international OEMs.

Choice sees any short-term stock price volatility in the sector as an opportunity to accumulate fundamentally strong names like HAL and BEL, which are well-positioned to benefit from the sector's long-term structural growth.