War has returned to the centre of global politics. The United States and Israel recently struck civilian, infrastructure and military targets in Iran, triggering missile exchanges across West Asia and raising fears of a wider conflict.

These wars show how quickly modern militaries use up missiles, drones and air defence systems. US and Israeli forces used over 4,000 guided weapons to strike Iranian targets in the early phase of the conflict. Countries now want stronger domestic production instead of relying heavily on imports, because foreign weapons usually require licenses and ongoing payments to the original manufacturer.

The Indian government has allocated about Rs 7.9 lakh crore to the Ministry of Defence (MoD) for 2026–27, the largest share among all ministries. Much of this spending will fund new equipment, with most orders reserved for Indian manufacturers.

India has also faced its own security challenges. In 2025, Indian forces launched Operation Sindoor after a major cross-border terror attack. The operation underlined the need for faster domestic production of military equipment.

Recent policy changes now focus on execution. The draft Defence Acquisition Procedure 2026 (DAP) allows the government to check how busy a company already is before awarding large contracts. 

In the Advanced Medium Combat Aircraft (AMCA) fighter jet program, the government used a 3x rule. Companies cannot lead the project if their order backlog is more than three times their annual revenue. Ashish Saraf, India head at Pratt & Whitney, said, “The new defence policy aims to buy equipment faster and focus on quality, not just the lowest price." 

In this edition of Chart of the Week, we examine how these changes are reshaping opportunities across India’s defence sector.

Government prioritises execution capacity over legacy

The draft DAP 2026 focuses on execution capacity. It lets the government check whether companies already have too many pending projects.

The AMCA fighter jet program offers the first example of this backlog rule. The Rs 15,000 crore program aims to build India’s first fifth-generation stealth fighter jet for the Air Force. 

Hindustan Aeronautics (HAL) currently holds an order book of about Rs 2.3 lakh crore. This equals more than 11 times its annual revenue based on the first nine months of FY26. Under the 3x filter, it cannot lead the AMCA program.

HAL can still participate in the project, but cannot lead the development phase. HAL may still provide testing facilities, but the lead private contractor will design the aircraft and own the technology.

The Defence Secretary did not disclose the firms shortlisted to lead the AMCA program. Sources said the contenders include private groups led by Tata Advanced Systems; Larsen & Toubro with Bharat Electronics and Dynamatic Technologies; and Bharat Forge with BEML and Data Patterns.

Akash Pratim Debbarma, defence analyst at GlobalData, said the move could reduce delays in India’s fighter jet program. “Separating AMCA from HAL’s already heavy workload reduces pressure on factories and suppliers, reducing the overall programme risk,” he said.

The policy encourages private-led consortia instead of single dominant PSUs. The rule applies mainly to the lead contractor. Other companies can still participate as partners.

This change favors companies that still have capacity to execute new projects.

Component makers drive the next phase of defence growth

Electronics suppliers are beginning to shape the next phase of defence production. Modern military platforms increasingly depend on electronics. The 2026 defence budget reflects this trend. The government increased defence capital spending by about 22% YoY to fund new equipment and upgrades.

Amit Anwani, Lead Analyst at PL Capital, said modern warfare now depends heavily on surveillance systems, radars and electronic equipment. “Building layered defence networks will require sustained research spending,” he added. The government has allocated Rs 29,100.3 crore for defence research and development, with the Defence Research and Development Organisation (DRDO) leading the effort along with startups.

Bharat Electronics (BEL) plays a central role in this shift to defence electronics. The company supplies radars, communication systems and sensors used in aircraft, naval vessels and land platforms. As India builds more defence equipment, these systems are integrated across many platforms. 

BEL has also joined Larsen & Toubro and Dynamatic Technologies in a private consortium bidding for upcoming defence production programs.

Data Patterns is benefiting from the same shift. Its order book grew 71% over the past year. The company designs radars, electronic warfare systems and avionics used in aircraft, missiles and surveillance platforms. These products require specialised design and engineering and typically earn higher margins than basic metal parts.

Chairman and Managing Director S Rangarajan said, “The company is moving from a subsystem supplier to a full systems and solutions provider.” This transition requires higher research spending because the company is developing more of its own technology instead of relying on imported designs. Costs rise initially, but margins improve later as the same technology is used across multiple products.

For years, defence investors focused mainly on order books. The next phase may depend more on delivery and technological capability. HAL and Bharat Dynamics already have large backlogs and are working through existing orders. Companies such as BEL and Data Patterns could see stronger demand as defence equipment becomes more electronics-driven.

Duty cuts support India’s defence manufacturing expansion

Policy changes are improving the economics of defence manufacturing. The government has removed the 7.5%-15% basic customs duty on raw materials used to produce aircraft parts. These import taxes had increased production costs for domestic suppliers

Lower input costs support margins as production volumes rise. Azad Engineering, which supplies components for fighter jet engines, could benefit as aircraft manufacturing scales up. The duty removal helps the company control input costs while increasing output.

PTC Industries is expanding its aerospace materials business through its Aerolloy segment, which produces titanium castings for aerospace engines. The segment reported 126.8% income growth during the first nine months of FY26. Duty exemptions strengthen its cost advantage in domestic engine material production.

Munitions manufacturers are also scaling up. Solar Industries’ defence order book has nearly tripled since last year, while defence revenue rose 72% in Q3FY26. The company plans to begin supplying Pinaka rockets from Q4, which could further increase defence sales. International operations are also expanding, with overseas markets contributing about 40% of quarterly revenue.

Still, fully owning advanced defence technology is difficult. Ashish Saraf said, “Efforts to completely own foreign technology may not always succeed because countries rarely share their most advanced systems. In many cases, working with global partners may prove more practical.”

Ultimately, the companies that deliver projects on time will benefit most. Defence spending is rising, but procurement rules and delivery timelines will determine where the contracts go. Investors may need to look beyond headline order books and focus on companies that can deliver projects on schedule while maintaining profitability.