The defence industry doesn’t appear to have run out of arsenal even as the Nifty lost more than 5% since the start of the war about two weeks ago, halting energy supplies across a narrow but crucial waterway that largely feeds Indian refiners and its transport. Since hostilities began, the defence sector has been India’s second-best performer in the risk-off universe – after the Pharma index.
“The recent rally in defence stocks appears to be driven by expectations of sustained increases in global defence spending amid ongoing geopolitical tensions,” said Krishna Doshi, defence analyst, Ashika Institutional Research.
Doshi said at present, much of the buying seems sentiment-led.
The Defence index has gained 1.6% since the start of the turmoil at the beginning of March, against the benchmark Nifty 50, which is down 5.2%.
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On Wednesday, however, the defence index fell 1.7%, erasing a part of its gains. The Nifty fell 394.75 points, or 1.6%, to end at 23,866.85. “Should geopolitical conflicts de-escalate, the pace of inflows into the sector may moderate over the longer term,” Doshi said.
Within the defence space, investor interest has been particularly strong in companies with exposure to defensive systems such as counter-drone technologies, as well as in select offensive platforms, including missiles systems and drones, said Doshi.
analysts point to potential local buys and export opportunities
She said stocks such as Bharat Dynamics, Solar Industries, Data Patterns and Zen Technologies have witnessed notable buying interest.
The defence index has been a clear outperformer in the past year as a flurry of tensions, among Russia-Ukraine, India-Pakistan and now Israel/USA-Iran has hiked the need for defence mechanisms.
“Since the Russia-Ukraine conflict, we have seen an increase in defense spending globally, which reinforces the view that defense is a long-term investment theme,” said Harshit Kapadia, Vice-President at Elara Securities.
At the same time, countries are increasingly focusing on domestic manufacturing rather than relying heavily on imports, given the risks of supply chain disruptions during geopolitical conflicts, said Kapadia.
“These two factors support the case for maintaining some allocation to the defence sector over the next 5-10 years.”
A report from Motilal Oswal Financial Services said the current conflict in the Middle East is likely to drive higher global defense spending as nations prioritise security and military preparedness. Motilal’s analysts said in this environment, India’s defence sector is well positioned to benefit from both rising domestic procurement and increasing export opportunities, supported by the government’s push for indigenization and a growing reputation in global arms markets.
BUY, BUT NOT JUST YET
The defence index has run-up over 47% in the past year, while the Nifty is up just 6%. This could have driven up the valuations of the sector. MTAR Technologies, Data Patterns (India) and Garden Reach Shipbuilders & Engineers have been the top gainers in the past year, up 86-176%. Kapadia said the recent rally driven by expectations of higher Indian defense exports has pushed valuations higher, so investors may consider adding exposure on any dips. He remains bullish on Hindustan Aeronautics, Bharat Dynamics and Bharat Electronics among PSUs, and Solar Industries and Bharat Forge among private players over a longerterm. Doshi advises buying Data Patterns on dips.
“From a valuation perspective, Hindustan Aeronautics appears relatively inexpensive among defence peers, currently trading at around 23 times FY28E earnings per share(EPS) with the execution speed to ramp up in FY27. We also remain constructive on Garden Reach Shipbuilders & Engineers and Mazagon Dock Shipbuilders, supported by their strong order pipelines and consistent execution track record, with both companies trading at approximately 26 times FY28E EPS,” she said.