The defense industry does not seem to have lost its weapons stocks even as the Nifty has lost more than 5% since the start of the war about two weeks ago, disrupting energy supplies along a narrow but important waterway that largely feeds Indian refineries and its transport. Since the start of hostilities, the defense sector has been India’s second-best performer in the world’s risk-averse index, after pharma.
“The recent rally in defense stocks appears to be driven by expectations of continued increase in global defense spending amid ongoing geopolitical tensions,” said Krishna Doshi, defense analyst at Ashika Institute Research.
Doshi said that most of the buying right now seems to be driven by sentiment.
The defense index has risen 1.6% since the turmoil began in early March, versus the benchmark Nifty 50, which is down 5.2%.
However, on Wednesday, the defense index fell 1.7%, erasing part of its gains. The Nifty fell 394.75 points, or 1.6%, to end at 23,866.85. Doshi said, “If geopolitical conflicts subside, the pace of recovery in the sector may be moderate for a longer period of time.”
Within the defense space, investor interest is particularly strong in companies facing defense systems such as anti-drone technologies, as well as advanced attack platforms, including missile systems and drones, Doshi said.
InstitutionsAnalysts point to potential local procurement and export opportunities
She said stocks like India Dynamics, Solar Industries, Data Patterns and Zen Technologies have seen significant buying interest.
The defense index has been a marked improvement over the past year as tensions between Russia-Ukraine, India-Pakistan and now Israel/US-Iran escalate.
“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 subject,” said Harshit Kapadia, vice president of Elara Securities.
At the same time, countries are focusing on domestic production instead of over-reliance on imports, given the risks of supply chain disruptions during geopolitical conflicts, Kapadia said.
“These two factors support the case for maintaining some allocation to the defense sector over the next 5-10 years.”
The current conflict in the Middle East is likely to increase global defense spending as countries prioritize security and military preparedness, said a report by Motilal Oswal Financial Services. In this environment, the Indian defense sector is well-positioned to take advantage of increased domestic procurement and increased export opportunities, supported by the government’s push for indigenization and growing prominence in international arms markets, Motilal analysts said.
Buy, but not just yet
The Defensive Index has risen more than 47% in the past year, while the Nifty is up just 6%. This may increase sector values. MTAR Technologies, Information Patterns (India) and Garden Reach Shipbuilders and Engineers are top gainers from 86-176% over the past year. Kapadia said that the recent rally on expectations of higher Indian defense exports has boosted valuations, so investors may want to consider exposure to any cuts. He remains bullish on long-term PSUs such as Hindustan Aeronautics, Bharat Dynamics and Bharat Electronics, and Solar Industries and Bharat Forge among private players. Doshi advises buying data samples at dips.
“From a valuation perspective, India Aeronautics looks relatively cheap among defense peers, currently trading at around 23 times FY28E earnings per share (EPS) with execution momentum in FY27. We also remain bullish on Garden Reich Shipbuilders and Engineers and Mazagon Dock Company supported by strong consular and their strong consoles. record, with both companies trading at around 26 times FY28E EPS,” she said.
