Nuvama picks BEL, Data Patterns as top defence bets amid sector tailwinds

India's defence electronics sector is poised for accelerated growth, expanding at 2–3 times the pace of the overall defence budget, according to a recent note from Nuvama Institutional Equities. The brokerage projects a 7–8 per cent compounded annual growth rate (CAGR) for the sector over the next five years, driven by two major catalysts: an ongoing modernisation push and rising localisation content in large-scale programs planned for the Indian Air Force and Navy.

The domestic brokerage highlighted four structural drivers underpinning this momentum: import curbs under the defence embargo list, a steady rise in defence exports, efforts to upgrade ageing defence equipment amid delays in the induction of indigenous systems and increased collaboration with foreign original equipment manufacturers (OEMs) to build high-tech solutions.

Nuvama noted that the slower pace of domestic arsenal development -- largely due to reliance on foreign supply chains -- has shifted the focus towards modernising existing platforms. This transitional phase is expected to last two to three years, creating opportunities for players with proven capability in upgrade and integration projects. Key upcoming initiatives like Project Kusha and the Quick Reaction Surface-to-Air Missile (QRSAM), which feature significantly higher indigenous content, are likely to enhance domestic manufacturing depth.

On the policy front, the Ministry of Defence (MoD) is reportedly working to expedite procurement timelines. The aim is to cut the average acquisition cycle from 96 weeks to just 24 weeks, although implementation remains pending.

The broking firm pointed out that Indian defence equities have seen substantial re-rating over the past few years, driven by strong visibility from the government's indigenisation agenda, heightened NATO-related export opportunities and recent geopolitical tensions that have intensified defence spending.

Private defence firms have been the primary beneficiaries of this shift, outperforming traditional defence public sector undertakings (DPSUs) in terms of earnings growth and return ratios. Despite trading at a premium, their higher RoEs and RoCEs have continued to attract investor interest.

Among its top stock recommendations, Nuvama cited Bharat Electronics Ltd (BEL) and Data Patterns India Ltd, both seen as key beneficiaries of the structural and cyclical tailwinds reshaping India's defence landscape. BEL continues to outperform with FY25 OPMs at 28.6 per cent versus guidance of 23–25 per cent, supported by higher indigenisation, cost efficiencies and a robust product mix. A Rs 30,000 crore QRSAM order expected in the next six months could act as a major re-rating trigger. 

For Data Patterns, the brokerage said it is well-positioned to tap into a Rs 2,000–4,000 crore opportunity over 18–24 months, driven by repeat high-value orders and macro tailwinds.

Meanwhile, BEL and Data Patterns slipped 1.03 per cent and 2.56 per cent, respectively, on Thursday.