Defence stocks have been on a bull spree, rallying up to 30% in just a week and surging more than 100% from their recent lows. But is this a mere tactical rebound, or does the rally have the firepower to sustain? Let’s break it down.
1) Big Falls, Big Bounce
Defence stocks were among the worst hit in the small- and mid-cap meltdown earlier this year, with many plunging 50-75% from their 2023 peaks. However, the sector has witnessed a sharp comeback, led by companies such as Mazagon Dock Shipbuilders (+183%), Garden Reach Shipbuilders & Engineers (+126%), and Cochin Shipyard (+67%). Other notable gainers include Paras Defence, Bharat Electronics, Bharat Dynamics, and Zen Technologies, which have climbed 48-56%.
Despite this surge, many stocks remain below their previous highs. The recent rally is largely driven by sentiment rather than fundamental shifts, as major institutional investors are yet to participate in the buying spree. Still, momentum traders have latched onto the positive narrative surrounding the sector.
2) Strong Domestic Tailwinds
The Indian government has been aggressively pushing for domestic defence procurement. March has been a crucial month, with the Defence Acquisition Council (DAC) clearing proposals worth ₹54,000 crore, adding to the ₹2.2 lakh crore of approvals in FY25 alone. The share of domestic procurement has risen from 54% in FY19 to 75% in recent years, reflecting a strong commitment to indigenisation.
A major breakthrough has been the reduction of procurement timelines from two years to just six months. This policy shift benefits key Indian defence companies such as PTC Industries, Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), and Bharat Dynamics.
Specific company developments have further reinforced confidence in the sector. HAL’s supply chain is improving with its Nasik factory becoming operational, paving the way for timely aircraft deliveries. BEL is capitalising on a surge in defence electronics orders, while Mazagon Dock Shipbuilders boasts a robust order book.
3) Global Military Spending Boom
The surge in global defence spending provides additional tailwinds. Military budgets worldwide hit $2.46 trillion in 2024, a 7.4% increase from 2023. Europe, in particular, has ramped up spending under NATO pressure and geopolitical concerns. Germany has announced a €500 billion defence programme, while former U.S. President Donald Trump has urged NATO allies to raise their defence budgets to 5% of GDP.
This global spending spree has fuelled defence stock rallies in the U.S., Europe, and Asia. Companies such as Lockheed Martin, BAE Systems, Rheinmetall, and Hanwha Aerospace have all surged, reinforcing the bullish sentiment surrounding the defence sector.
Overvaluation Concerns Loom
Despite the strong tailwinds, investors must be cautious about overvaluation. Currently, many defence stocks are trading at 40x FY27 earnings. While this may not seem exorbitant on a long-term basis, the concern is whether it’s justifiable to price stocks two years forward in the current market environment.
On a one-year forward basis, valuations look stretched, particularly for smaller stocks. Compared to their global peers, Indian defence stocks are expensive. Defence is a global industry where other countries like South Korea, Japan, and Europe are witnessing high growth and attracting investors. This could serve as a benchmark, limiting further upside in Indian defence valuations.
Additionally, historical market trends suggest that even strong narratives struggle when broader market sentiment turns bearish. With no major institutional buying yet, a prudent approach would be to accumulate stocks on dips rather than chase the rally blindly.
Final Thoughts
While the defence sector remains a compelling long-term play, the ongoing rally appears sentiment-driven rather than backed by immediate earnings growth. Investors should focus on fundamentally strong companies like Bharat Electronics, Bharat Dynamics, Cochin Shipyard, Hindustan Aeronautics, and Data Patterns—companies with solid order books and reasonable valuations.
In the coming weeks, as domestic defence spending gains traction, this rally may continue. However, the real test for defence stocks will come if the market undergoes another correction. Until then, caution and strategic stock selection will be key.
Disclaimer: This article is for informational purposes only and should not be considered as investment advice.
