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ICRA forecasts 15–17% revenue growth for Indian Defence sector in FY2026

ICRA forecasts 15–17% revenue growth for Indian Defence sector in FY2026

June 18, 2025 | Wednesday | Reports

ICRA has reaffirmed a positive outlook for the sector, citing sustained government support, rising indigenisation, and an expanding export base as key growth enablers

The Indian defence sector is poised to maintain robust growth in the coming fiscal, with entities across the board expected to witness a 15–17 per cent revenue expansion in FY2026, according to a recent analysis by rating agency ICRA. The momentum is driven by strong execution progress backed by a healthy order book, with the order book to operating income (OB/OI) ratio standing at 4.4x as of FY2025 end.

ICRA has reaffirmed a positive outlook for the sector, citing sustained government support, rising indigenisation, and an expanding export base as key growth enablers. The Government of India’s long-standing commitment to the ‘Atmanirbhar Bharat’ initiative is central to this transformation, with a comprehensive policy ecosystem that includes liberalised FDI norms, continued defence offset policies, and the establishment of Defence Industrial Corridors.

One of the standout factors has been the increase in defence procurement from domestic vendors, which rose from 61 per cent in FY2017 to an estimated 75 per cent in FY2025. Over the same period, defence exports have grown more than 15 times, recording a compound annual growth rate (CAGR) of 41 per cent, reaching Rs23,622 crore in FY2025e.

Suprio Banerjee, Vice President and Co-Group Head, Corporate Ratings at ICRA, noted that the entire spectrum of defence production—including land systems, naval, aerospace, armaments, and ICT segments—is set to benefit from this sustained policy and budgetary thrust. The capital outlay for defence has grown at a CAGR of 8.29 per cent over the last five years, with a budgeted estimate of Rs 1.92 lakh crore for FY2026, significantly enhancing domestic capabilities.

ICRA expects weighted average operating margins to remain strong at 25–27 per cent in FY2026, supported by economies of scale, deeper localisation, and a growing shift among players toward value-accretive, system-level manufacturing rather than just sub-component or assembly work.

The private sector is increasingly active in land-based and ICT-focused defence segments, while the Defence Public Sector Undertakings (DPSUs) continue to dominate the naval, aerospace, and armament verticals. In FY2025, 16 DPSUs and six key private players are projected to account for nearly 50 per cent of industry revenue.

Despite the optimism, working capital management remains a challenge, especially for private entities. While gross operating cycles remain elevated, exceeding 400 days in FY2025 for ICRA’s sample, various mechanisms are in place to offset the strain. DPSUs rely on mobilisation advances, while private players often tap equity financing routes like QIPs and preferential allotments.

“Efficient working capital management will be crucial for sustaining growth,” Banerjee added, noting that despite these headwinds, the sector's metrics for revenue growth and profitability meet ICRA’s benchmark for maintaining its positive outlook.

As India continues to expand its strategic defence autonomy and industrial base, the sector remains well-positioned to scale further, both as a national capability hub and as a rising player in global defence exports.