Best Small Cap Defence Stocks in India

Best Small Cap Defence Stocks in India

India’s defence sector is transforming with record budget increases (2025 – 26 allocation ~₹6.81 lakh crore), sweeping indigenisation mandates and export pushes. Capital outlay was hiked by +13% y/y, with 75% of modernisation funds earmarked for domestic procurement (of which ~₹28,000 Cr is reserved for private industry).

The MoD has declared 2025 a “Year of Reforms” (focusing on AI, cyber, joint commands and simpler acquisition), and launched positive indigenisation lists banning imports of thousands of items. As a result, defence production (₹1.51 lakh Cr in FY24-25) and exports (an‑all-time high ~₹23,622 Cr in FY24-25) are surging. Considering the above, India defense stocks are likely to perform well. Let us analyse top 5 defense companies in India to watch in 2026.

Defence Industry & Indian Defence Policy Trends

• Record Budget & Indigenisation: India’s 2025-26 defence budget is ~₹6.81 lakh Cr, roughly +6–9% higher than last year. Capital outlay (+13% y/y) and R&D lines were prioritised. Importantly, ~75% of the capital budget is now reserved for domestic procurement (roughly ₹1.12 lakh Cr for all domestic vendors, with ₹0.28 lakh Cr specifically for private firms).
  • The government has banned 5,012 items from import (positive indigenisation lists) and launched a digital SRIJAN portal to engage private industry. These moves – along with simplifying defence acquisition and easing FDI – are driving the “Aatmanirbhar” push and attracting global partners. For example, Zen’s recent JV with US firm AVT Simulation aims to tap the $ market, and ideaForge formed a US JV (“First Forge Tech”) to build drones overseas.
• Exports & Global Trends: Defence exports hit a record ~₹23,622 Cr in FY24-25 (up 12%), led by public and private firms alike. The MoD targets ₹50,000 Cr exports by 2029. India’s growing defence tech is finding buyers abroad (e.g. US imports of Indian defence tech topped $2.8 b in five years). Global defence-electronics, UAV and simulation markets are expanding.
  • The global military drone market was ~$20.2 b in 2023 and is growing ~12%/yr; the defence electronics market is ~$178 b in 2025 (forecast to ~$234 b by 2030 at ~5.6% CAGR); and the military simulation & training market is ~$13.7 b (2024), rising ~5.3%/yr to ~$22.8 b by 2034. These trends bode well for companies supplying radar/EW systems, simulators and UAVs.
• Imports to Domestic Manufacturing: Decades of import dependence are reversing: domestic firms now supply ~60–70% of capital kit (vs. <30% a decade ago), aided by higher domestic budgeting and bans on imports. Defence PSUs’ share of production is ~77%, but the private sector’s share is rising (23% in FY25, up from 21% in FY24) as big orders are now won by private innovators.
  • All five companies below exemplify this shift – they design and produce critical avionics, simulators, radars, opto-electronics and UAVs that India previously imported. Let us analyse these India defense stocks and their future outlook.

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Best Small Cap Defence Stocks in India

Indian Defence Small Cap Stocks to Buy

Data Patterns (India) Limited

Data Patterns is a pioneer of aerospace & defence electronics and one of the best defense companies in India, building radars, electronic warfare (EW) and avionics “brains” for India’s weapons. This is one of the best Indian Defence Small Cap Stocks to Buy. It is deeply involved in programmes like LCA-Tejas, HAL’s LUH helicopter and the BrahMos missile (e.g. BrahMos missile checkout/test equipment). It also exports EW systems; notable orderbook clients include DRDO and foreign defence forces. One of the small cap defense companies in India to watch during budget 2026.

• FY25 performance: Revenue was ₹708 Cr, up ~36% y/y. EBITDA was ~₹275 Cr (≈39% margin), and PAT ~₹222 Cr (≈31% margin). This reflects a jump from ₹566 Cr revenue in FY24, driven by an expanding orderbook and higher margins.
• Order Book: Firm orders stood at ~₹730 Cr as of Mar’25 (₹860 Cr including negotiated orders). (Contrary to earlier high claims, this implies a book-to-bill of only ~1.0x for FY25.) Nonetheless, management targets continued ramp-up: press reports note a healthy pipeline of BrahMos and EW sub-system contracts.
• Balance sheet: Data Patterns is debt-free, but its business is working-capital intensive. ICICI Securities notes its working-capital cycle is extremely long (≈343 days) (largely due to huge inventory and receivables). This equates to roughly a 1:1 ratio of net WC to sales. Delays in government payments and inventory stocking are key risks.
• Outlook: The company’s in-house R&D (180+ patents globally) and vertical integration (e.g. complete radar subsystems) position it well. Budget support, indigenisation rules and BrahMos modernisation orders should drive growth. However, the key risk is its very high WC/debtor cycle – any slowdown in collections can stress cash flow. Investors should watch its order conversion and cash flow closely.

Zen Technologies Limited

Zen is a leader in defence simulation, training and anti-drone systems. After merging with US-based ARIPL and acquiring ARI Labs, Zen now offers a broad suite of gunnery and tactical simulators for the Army/Air Force, as well as drones and anti-UAV systems. One of the best defense companies in India.

• FY25 performance: Revenues jumped to ~₹988 Cr (FY24 ~₹444 Cr), as acquired businesses contributed a full year. EBITDA was ~₹372 Cr (∼37.6% margin) and PAT ~₹263 Cr (∼26.6%). These margins remain high for a tech/service business.
• Order Book: Zen’s backlog (including ARIPL/ARI deals) was reported at ~₹6,900 Cr at FY25-end (a book-to-bill of ~0.7x given revenue). This order book includes large Army simulation contracts. (Zen’s book-to-bill <1 reflects one-off big orders in FY24 that rolled off.)
• Balance sheet: Zen is essentially net debt-free. Cash conversion is moderate – ICICI notes a cash conversion cycle of ~160 days (due to receivables/inventory). No major borrowings.

• Growth drivers: Zen has over 180 patents globally and >1,000 systems deployed. It’s expanding internationally: in Dec 2024, Zen signed an MOU with US simulator-maker AVT to access the US market. A recent patent (60 mm Mortar Simulator) and big MoD training contracts (e.g. a ₹120 Cr Combat Training Node order) highlight its innovation edge and domestic leadership.
• Outlook & risks: With governments boosting military training budgets and modernising battle simulation, Zen is well-placed. Key risks include integration/execution of large simulation projects (new acquisitions must be profitably integrated) and the seasonality of defence tenders. Also, a relatively low book-to-bill (0.7x) suggests Zen will need new order wins to sustain growth.

Astra Microwave Products Ltd

Astra produces radars, avionics, satellite communications and C4I systems. Its products include home-grown S-band surveillance radars, IFF/interrogators, satcom terminals and radiation detectors. Astra’s portfolio also serves civilian aerospace markets (e.g. air traffic control radar components). One of the best defense companies.

• FY25 performance: Consolidated revenue was ₹1,051 Cr (up ~15.6% from ₹909 Cr). EBITDA margin was ~25.6%, with PAT ₹154 Cr (net ~14.6%). Margins expanded from prior years due to operating leverage and richer product mix.

• Order Book: Astra reported a firm order pipeline of ~₹1,952 Cr at Mar 2025(stock ~1.85x FY25 sales). This backlog includes large radar and missile-project orders from the MoD. (Note: some sources cite up to ~₹2,300 Cr orderbook, including negotiations.)
• Balance sheet: Astra is conservatively financed (low debt) but has high working capital needs. Its working-capital-to-sales ratio is around 0.7, with debtor days often 120–150. Supply-chain delays or overseas remittance issues (for exports) can affect cash.
• Growth drivers: Astra is benefiting from expanded domestic demand for radars (border surveillance, drone detection) and telecom (4G/5G microwave). It plans to launch newer aerospace products (e.g. satellite comms gear). However, it competes with DPSUs for big radar orders.
• Outlook & risks: Astra’s growth is tied to continued defence spend and exports (it markets radars abroad). Key risks include delays in project execution (custom military orders have a long gestation period) and narrow margins if components become costlier. A moderate working capital cycle (~180–240 days) also warrants monitoring.

Paras Defence & Space Technologies Limited

Paras Defence specialises in optronics and C4I systems. It makes high-end day/night sights for armoured vehicles and UAVs, airborne EO cameras, and IR “payloads” (e.g. for HAL’s Tejas Mk1A). It also produces rugged displays for fighter jets and naval use. Paras is one of the few defense companies in India making advanced UAV cameras.

• FY25 performance: Revenue was ₹364.7 Cr (FY24: ₹253.5 Cr), a ~44% jump reflecting new programs and exports. PAT was ₹65.1 Cr (≈17.8% net margin), nearly double FY24 profit due to higher volumes and better costs.
• Order Book: Consolidated orderbook stood at ~₹928 Cr at FY25-end (over 2.5x FY25 sales). This includes multi-year defence contracts (e.g. UAV optoelectronics) and tied-up exports.

• Balance sheet: Paras holds little to no debt. However, its working capital is significant (~high receivables ~150–180 days) because of payment terms with MoD and foreign clients. Inventory also builds up for long-term projects.
• Growth drivers: Paras is riding India’s UAV boom and Army modernisation (it is a primary supplier of optronics for Indian drones and the Sarang helicopter). It has an MoU with Israel’s MicroCon Vision (Controp) to develop drone camera tech locally. It may tap new geographies via offset tie-ups.
• Outlook & risks: Strong export contracts and UAV demand underpin Paras’s prospects. But as a small company focused on narrow niches, it faces execution risk (delays in defence approvals or tech integration). Customer concentration is also a risk (a few large contracts dominate revenue). Ensuring timely delivery and payment collection is critical for its cash flows.

ideaForge Technology Limited

ideaForge is the leading “Make in India” drone maker. It designs and builds UAVs for military and civilian surveillance (notably, the Switch and Garuda series used by the Army/IAF). After early success (FY23 revenue ~₹300+ Cr), ideaForge’s revenues plunged as government procurement slowed.

• FY25 performance: Revenue fell to ₹161.2 Cr (down ~49% from ₹314 Cr in FY24). The company swung to a net loss of ₹62.3 Cr (FY24: +₹45.3 Cr profit) driven by inventory write-offs and muted sales. EBITDA was negative as well.
• Order Book: Its firm orderbook at Mar’25 was only ~₹136 Cr (book-to-bill ~0.84x). This low backlog reflects the lull in defence UAV tenders. However, media reports indicate fresh orders (e.g. two late FY25 contracts of ₹107 Cr and ₹137 Cr), which should lift the orderbook substantially in FY26.
• Balance sheet: ideaForge is debt-free, but cash burn has been high due to R&D and unsold inventory. The pivot to R&D-heavy platforms has stretched finances.
• Growth drivers: The company is positioning for the next wave of drone demand. It formed a 50:50 US JV (First Forge Tech) to manufacture UAVs in America, and earned NATO stock numbers on some platforms (a first for an Indian drone), which could open exports. The Defence Procurement Manual 2025 and renewed procurement cycles (EP-6) are expected to restart domestic orders.
• Outlook: ideaForge is a special situation. Its stock action (recent 20% rally) has been tied to geopolitical tensions (e.g. Indo-Pak skirmishes) and expected orders. If the company can deliver on its current pipeline (and manage costs), there is significant upside from its FY24 revenue base.
• Risks include the execution of new products (they’ve launched many prototypes) and the time lag to profitability. The drone market is also competitive and reliant on government budgets; any delays or contract cancellations could further strain results.

Comparison of Defense Companies in India

Defense Companies in India	FY25 Revenue (₹Cr)	FY25 EBITDA Margin	Order Book (₹Cr)	Book/Bill (FY25)	Key Risks
Data Patterns (DataPat)	708	~39%	~730 (860 incl. converts)	~1.0×	Very long working-capital cycle (∼343 days); payment delays. Reliance on large defence programmes.
Zen Technologies	988	~38%	~6,900	~0.7×	Orderbook slippage (book/bill <1) – needs new large contracts. Integration of acquisitions (ARI). Cyclical defence spending.
Astra Microwave	1,051	~26%	~1,952 (pipeline)	~1.85×	Execution risk on radar programs. Working capital (~180–240 days) and raw-material costs. PSU competition for orders.
Paras Defence	364.7	~18% (net)	~928	~2.55×	Highly project-driven; concentrated clients. Inventory and receivables (~150–180 days). Tech execution risk on optronics.
ideaForge	161.2	– (loss)	~136	~0.84×	Execution risk on new drone products. Cyclical orders, cash burn and inventory. Dependent on govt. Tenders.

Final words on India Defense Stocks

These five niche small-caps offer exposure to India’s defence-modernisation push. All have shown strong revenue growth on rising military budgets, and each play to government priorities (indigenisation, UAVs, training, electronic warfare). Data Patterns and Zen boast world-class R&D (patents and systems), Astra and Paras fill critical product gaps, and ideaForge is the leading indigenous drone OEM.

However, investors must weigh risks: high working capital (DataPat, Astra), execution of large orders (Zen, Paras), and volatile procurement cycles (ideaForge). With India aiming to double defence manufacturing by 2029, these defense companies in India could outperform if they convert their backlog and control costs. The table above highlights their financial strength and vulnerabilities.

In sum, Data Patterns, Zen, Astra, Paras and ideaForge are a few niche defense companies in india but are best defense companies, well‐aligned with India’s “Aatmanirbhar Bharat” defence agenda.

Disclaimer: This is my own view, investors should consult their financial advisor before invest.

FAQs: Make in India & India defense stocks