Kotak Securities Picks HAL Over Mazagon Dock & Solar Industries, Sees Upside Only in HAL

Kotak Securities has initiated coverage on several leading Indian defence companies, identifying Hindustan Aeronautics Limited (HAL) as its preferred investment while assigning cautious ratings to Mazagon Dock Shipbuilders (MDL) and Solar Industries. Although the brokerage remains highly optimistic about India's long-term defence sector growth, it believes current valuations leave limited upside for several stocks.

The brokerage has assigned an 'ADD' rating on HAL with a fair value target of ₹4,810, while initiating 'SELL' ratings on Mazagon Dock Shipbuilders and Solar Industries, with target prices of ₹1,950 and ₹10,300, respectively. Kotak Securities also maintained its earlier cautious stance on Bharat Electronics (BEL) with a 'Reduce' rating and Cochin Shipyard (CSL) with a 'Sell' recommendation.

Kotak Securities Ratings on Defence Stocks

Company	Rating	Target Price
Hindustan Aeronautics (HAL)	ADD	₹4,810
Mazagon Dock Shipbuilders	SELL	₹1,950
Solar Industries	SELL	₹10,300
Bharat Electronics (BEL)	REDUCE	Existing Coverage
Cochin Shipyard (CSL)	SELL	Existing Coverage

India's Defence Sector Enters a Multi-Year Growth Cycle

Kotak Securities believes India's defence industry is entering a structural growth phase supported by rising government spending, increasing domestic manufacturing, and expanding export opportunities. According to the brokerage, India's defence capital expenditure is expected to grow at an 11% CAGR between FY2026 and FY2030, reaching approximately ₹2.8 lakh crore.

The report also highlighted the sharp rise in Acceptance of Necessity (AoN) approvals, which have increased nearly tenfold over the past five years to ₹9.3 trillion. This is expected to translate into fresh defence orders worth ₹6.5–7 trillion during FY2027–FY2029, creating significant long-term opportunities for domestic defence manufacturers.

Key Growth Drivers for India's Defence Industry

Growth Driver	Outlook
Defence Capital Expenditure	11% CAGR (FY26–FY30)
Expected Defence Capex by FY30	₹2.8 lakh crore
AoN Approvals	₹9.3 trillion
Expected New Orders	₹6.5–7 trillion
Domestic Procurement Share	Above 70%
Defence Export Target	₹50,000 crore by FY29

HAL Stands Out on Execution and Valuation

Among the companies under coverage, Kotak Securities believes HAL offers the best risk-reward profile. The company remains India's leading aerospace and defence manufacturer with a strong order pipeline, improving execution capabilities, and long-term visibility supported by indigenous aircraft production and defence modernization programmes.

HAL continues to benefit from the government's increasing focus on self-reliance in defence manufacturing under the "Make in India" initiative. The brokerage believes these structural tailwinds position HAL to deliver relatively stronger earnings growth compared with peers.

Why Kotak Is Cautious on Mazagon Dock and Solar Industries

Despite acknowledging the strong fundamentals of the defence sector, Kotak Securities believes several defence stocks are trading at demanding valuations. According to the brokerage, Indian defence companies currently trade at nearly 50 times one-year forward earnings, significantly above the 28 times average valuation of global defence companies.

This premium valuation has prompted the brokerage to remain selective despite expecting sustained sector growth. While Mazagon Dock Shipbuilders and Solar Industries continue to benefit from healthy order books and favourable industry trends, Kotak believes much of the positive outlook is already reflected in their current share prices.

Defence Exports and Drone Opportunity Remain Key Themes

Kotak Securities expects India's defence exports to remain one of the biggest long-term growth drivers for the sector. Defence exports have reportedly increased nearly 50-fold over the past decade, with the government targeting exports worth ₹50,000 crore by FY2029.

The brokerage also highlighted drones as one of the fastest-growing segments within defence manufacturing. It estimates that India could spend between $25 billion and $30 billion on drone technologies over the next decade, alongside an additional $4–5 billion on counter-drone systems as modern warfare increasingly shifts toward autonomous technologies.

Emerging Opportunities in Indian Defence

Segment	Estimated Opportunity
Drone Systems	$25–30 billion
Counter-Drone Systems	$4–5 billion
Defence Export Target	₹50,000 crore by FY29
Domestic Procurement	Above 70%

Market Outlook

Kotak Securities remains optimistic about the long-term prospects of India's defence industry, supported by higher government spending, rapid indigenisation, growing exports, and modernization programmes. However, the brokerage believes elevated valuations warrant a selective investment approach. Among its coverage universe, Hindustan Aeronautics Limited (HAL) stands out as the preferred investment, while investors may need to be cautious about stocks where future growth expectations are already significantly priced in.

1. Which defence stock does Kotak Securities prefer?

Kotak Securities has initiated coverage on HAL with an 'ADD' rating and a target price of ₹4,810, making it its preferred defence stock.

2. Why did Kotak Securities assign 'SELL' ratings to Mazagon Dock and Solar Industries?

The brokerage believes both companies are fundamentally strong but currently trade at rich valuations, limiting near-term upside potential.

3. Why is Kotak Securities bullish on the Indian defence sector?

The brokerage expects strong growth driven by rising defence capital expenditure, increasing domestic procurement, expanding exports, and long-term modernization programmes.

4. What is Kotak Securities' outlook on defence exports?

Kotak expects India's defence exports to continue growing, with the government's target of ₹50,000 crore by FY2029 serving as a major long-term growth catalyst.