HAL gets Kotak ADD; defence capex seen at ₹2.8 tn

Coverage begins with a selective stance on defence

Kotak Securities has initiated coverage on India’s listed defence space with a message that is supportive on the sector outlook but cautious on stock-specific upside. The brokerage said India’s defence sector is in a “multi-year structural upcycle”, yet current valuations across many names leave limited room for further upside. Against that backdrop, Kotak’s preferred pick among the companies it initiated on is Hindustan Aeronautics Ltd (HAL), which received an ‘ADD’ rating. At the same time, Kotak assigned ‘SELL’ ratings to Mazagon Dock Shipbuilders (MDL) and Solar Industries, even while staying constructive on the longer-term demand environment.

The note lands at a time when investors are tracking order-flow visibility and execution capacity ahead of earnings and policy milestones. Defence remains a market theme, but brokerages are increasingly differentiating between the strength of the sector cycle and the prices investors are paying for that growth.

HAL rated ‘ADD’ with a ₹4,810 fair value

Kotak Securities initiated coverage on HAL with an ‘ADD’ rating and a fair value of ₹4,810 per share. In the related coverage universe, Mazagon Dock Shipbuilders and Solar Industries were both initiated with ‘SELL’ calls, with fair values of ₹1,950 and ₹10,300, respectively. The brokerage also maintained its earlier ratings on Bharat Electronics (BEL) and Cochin Shipyard (CSL), keeping a ‘REDUCE’ on BEL and a ‘SELL’ on CSL.

Kotak’s stance implies it sees HAL as the relatively better risk-reward option in a sector where valuations are already pricing in strong growth. In the coverage note, it also highlighted the importance of companies that combine large order books with execution capability and diversified product portfolios.

Kotak’s numbers: capex growth and approvals pipeline

A key pillar of the brokerage’s positive sector view is the expected rise in government capital spending on defence. Kotak forecast defence capex to grow at an 11% CAGR over FY2026 to FY2030E, reaching about ₹2.8 trillion by FY2030E. The note also pointed to a sharp rise in Acceptance of Necessity (AoN) approvals, describing them as having surged 10x over FY2021 to FY2026 to about ₹9.3 trillion.

Kotak added that the approvals momentum implies about ₹6.5 trillion to ₹7.0 trillion in new orders during FY2027 to FY2029E. Put simply, the brokerage expects approvals and budgeting to remain supportive enough to sustain ordering activity over several years, even though the timing of conversion from approvals to executable contracts can vary.

Indigenisation remains a structural tailwind

Alongside capex and approvals, Kotak highlighted the policy thrust toward indigenisation. The domestic procurement share was cited as rising from 54% in FY2019 to 70%+ more recently. This shift matters because it supports a larger domestic addressable market for Indian manufacturers, and it can improve the long-term visibility for platforms and programmes that are built and supported locally.

The brokerage also referenced higher defence exports as part of the longer-term growth narrative for the sector. Together, rising capital allocations, a larger approvals pipeline and a sustained indigenisation push form the core of the “structural upcycle” thesis.

Valuations are the constraint: premium to global peers

Despite the constructive demand outlook, Kotak emphasised that the sector is expensive. It said Indian defence companies trade at around a 50% valuation premium over global peers, citing roughly 50x one-year forward P/E for Indian names versus 28x for global peers. That valuation gap is central to why Kotak is selective in its recommendations, preferring HAL while taking negative views on certain others.

This approach also underlines a key point for investors: a strong multi-year cycle can coexist with limited near-term upside in stocks if market prices already discount much of the growth.

Market reaction: MDL and Solar lower on the day

On the day of the coverage note, both Mazagon Dock and Solar Industries were reported to be trading lower. Mazagon Dock was down about 2.5%, while Solar Industries was down about 4%. The move aligns with the headline nature of fresh ‘SELL’ calls and target prices, particularly in a sector where positioning can be sensitive to valuation commentary.

HAL, by contrast, was positioned as Kotak’s preferred pick within the initiation basket, with the fair value of ₹4,810 set against a cited current market price of ₹4,365 in one of the reports referenced.

Broader context: order books and execution focus into results season

Separately, commentary in the same news flow highlighted that investors are watching execution trends closely during the earnings season, given the sector’s premium valuation. In that context, Hindustan Aeronautics was described as entering the season with an order book of about ₹2.54 trillion and a prospective pipeline of about ₹4.6 trillion across programmes such as Tejas Mk2 and IMRH.

This reinforces why execution capability keeps coming up in sector notes. When valuations are elevated, the market typically demands timely delivery, stable margins and credible conversion of order books into revenues.

Key numbers at a glance

Why the report matters for investors

Kotak’s initiation frames the current defence trade as a balance between long-duration tailwinds and near-term valuation risk. The brokerage is effectively saying the sector’s demand drivers are intact, but investors should be more careful about entry prices and stock selection. For portfolio decisions, the call highlights two practical filters that are likely to matter over the next few quarters: the scale and quality of order books, and the ability to execute on large programmes without delays.

It also signals that rating divergence across brokerages can widen when a sector becomes crowded. Even in a supportive macro and policy setting, target prices can compress if the market continues to price the group at a premium to global peers.

Conclusion

Kotak Securities’ defence coverage starts with HAL as its preferred pick, while MDL and Solar Industries are rated ‘SELL’ amid concerns that sector valuations already reflect much of the growth. The brokerage’s core thesis rests on an 11% defence capex CAGR through FY2030E, a sharp rise in AoN approvals to ₹9.3 trillion, and a sustained indigenisation push. Investors will now track how order conversion and execution trends evolve through the upcoming results season, alongside any further updates on ordering timelines and capital allocations.