Explained: Why Defence Stocks Are Booming – Is It Right Time To Invest?

Defence Stocks: India’s defence stocks are on a roll, with the Nifty India Defence Index hitting record highs recently. 

Strong government support, growing global demand, and rising geopolitical tensions are fueling investor optimism in the sector.

On Monday, May 26, the Nifty India Defence Index climbed by 0.80%, adding to its robust performance over the past year. 

Over the last quarter alone, the index surged 61.66%, with a 5.09% rise in the past week, and nearly 39% over the last year.

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Why Are Defence Stocks Rising?

The momentum in defence stocks follows a review meeting led by Defence Minister Rajnath Singh with CMDs of eight Defence Public Sector Undertakings (DPSUs) in New Delhi. Singh praised the sector’s contribution during Operation Sindoor and underlined the government’s push towards indigenisation and innovation.

He directed DPSUs to focus more on R&D and timely delivery while expanding exports. He also congratulated Hindustan Aeronautics Limited (HAL) for achieving Maharatna status and Mazagon Dock Shipbuilders Ltd (MDL) for gaining Navratna status.

Highlighting growth, the total value of production by DPSUs is expected to exceed Rs 1.4 lakh crore in FY 2024-25, with DPSUs contributing nearly 78%.

Advanced Combat Aircraft Programme

In a significant move, Rajnath Singh also approved the execution model for the Advanced Medium Combat Aircraft (AMCA) programme.

The Aeronautical Development Agency (ADA) will partner with Indian industries, both public and private, to build the next-generation fighter jet.

This open and competitive model is aimed at building indigenous capability under the Aatmanirbhar Bharat vision.

Drone Race Fuel Optimism In Drone Stocks

Geopolitical tensions, especially with neighbouring Pakistan, are also influencing investor sentiment. A ceasefire brokered by the US hasn’t stopped the region’s growing interest in unmanned aerial vehicles (UAVs).

India is expected to triple its spending on drones to around $470 million in the next 12–24 months, Smit Shah of Drone Federation of India told Reuters. Domestic firms like IdeaForge and NewSpace are ramping up R&D to improve performance and reduce reliance on imported parts, especially from China.

“Their ability to loiter, evade detection, and strike with precision marks a shift toward high-value, low-cost warfare,” Sameer Joshi of NewSpace told Reuters. But supply chain dependence on Chinese components remains a key concern.

“Weaponisation of the supply chain is an issue,” said Vishal Saxena of ideaForge, noting that Chinese restrictions could hamper Indian production in a crisis.

Analyst Outlook: Strong Order Book and Execution

Defence stocks have shown strong momentum over the past couple of weeks, but experts advise some caution at current levels. 

Nilesh Jain, Head of Derivatives and Technical Research at Centrum Broking Ltd., says that while the trend remains positive, volumes at higher levels are thinning, which could indicate a near-term consolidation phase.

“The momentum is looking strong. But the only concern is that, as of now, the volume at high levels is a little dry. So, one needs to be careful creating any sort of aggressive long positions,” Jain said. “We are not expecting any further up move immediately, which means there could be some bit of consolidation at present,” he added.

Despite the caution, Jain remains bullish on the broader defence sector from a short- to medium-term perspective and has identified two stocks with strong upside potential.

“First of all, Mazagon Dock (Mazdock) has given a good breakout from its one-and-a-half to two-year consolidation zone. The target comes around Rs 4,200 to Rs 4,500, with support placed at Rs 3,200,” he noted.

Another preferred pick is Hindustan Aeronautics Limited (HAL). “This is another defence play where we expect a price target of Rs 5,500 in the short to medium term, with a support level at Rs 4,650,” Jain said.

In conclusion, Jain recommends a cautious but optimistic approach. “At high levels, we would advise staying light. If at all you see any dip, then the dip can be used as a buying opportunity or bought in a staggered manner. From a positional perspective, say the next one to two years, I think there is still more room left on the upside for the defence pack,” he advised.

Despite concerns about high valuations, analysts remain upbeat. According to IIFL, as quoted by Bloomberg, the defence sector has strong order visibility and sustained demand, both domestically and internationally.

They expect defence stocks to outperform, with Bharat Electronics Limited (BEL) as their top pick due to its excellent execution track record.

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