Following Operation Sindoor, leading Indian defence stocks like HAL, BEL, Bharat Forge, and BEML soared over 10% within a week, with several stocks posting gains nearing 40%. This surge has prompted investors to question the long-term economic case for including defence sector stocks in their portfolios.
Geopolitics, Markets, and the Investor’s Dilemma
To paraphrase the legendary Greek statesman Pericles, you may not be interested in geopolitics, but geopolitics is always interested in you—and, by extension, your investments. Nowhere is this more evident than in today’s global financial markets, where regional conflicts and shifting alliances are swiftly reflected in portfolio performance, especially for investors with exposure to sectors sensitive to international developments.
The events of recent weeks have served as a stark reminder for investors: when it comes to risk and opportunity, geography is destiny. This truth is especially pronounced for India—a country endowed with significant natural advantages, a large and youthful population, and an economy that consistently ranks among the fastest-growing in the world. Yet, India’s unique geographical setting, surrounded by neighbours with complex and often adversarial political systems, presents both formidable challenges and unique investment opportunities.
India’s Challenging Neighbourhood: The Strategic Context
India’s immediate neighbours represent a spectrum of governance systems, including a military dictatorship that struggles with legitimacy, an expansive one-party state with global ambitions, an aspiring theocracy, and a parliamentary republic still grappling with its post-colonial legacy. At the heart of this tumultuous region sits India—the world’s largest democracy and an emerging economic powerhouse.
For investors, this context is crucial. In a neighbourhood marked by volatility, border disputes, and competing interests, geopolitical flare-ups are not rare events but recurring features. Consequently, shoring up India’s defence capabilities is not a discretionary option; it is a strategic imperative that requires sustained and significant investment over many years, if not decades.
Defence as a Core Sector: Time for a Portfolio Rebalance?
Traditionally, retail investors in India have focused on sectors such as banking, information technology (IT), and fast-moving consumer goods (FMCG) to anchor their portfolios. However, recent developments have led to a fundamental question: Should defence stocks now be accorded the same importance as these mainstays? The answer, increasingly, appears to be yes.
From Cyclical Fluctuations to Strategic Growth
The resurgence of Indian defence equities began in earnest after Operation Sindoor—an Indian military campaign launched on 7 May, targeting terror camps in Pakistan and Pakistan-occupied Jammu and Kashmir, in retaliation for the Pahalgam terror attack that claimed 26 lives on 22 April. In the aftermath, shares of major defence companies such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics, Bharat Forge, BEML, Garden Reach Shipbuilders, and Mishra Dhatu Nigam rallied sharply, with gains exceeding 10% in just a week for many stocks, and some counters registering up to 40% since the commencement of hostilities.
This surge is not just short-term speculation. According to market experts, the inflow of capital into defence stocks is grounded in sound economic logic. History shows that military conflicts—such as the Uri and Pulwama attacks, and especially the 1962 India-China war—have consistently led to significant increases in defence spending. The 1962 conflict, for example, resulted in a doubling of defence expenditure from 2% to 4% of GDP and was a key catalyst for India’s nuclear weapons programme.
India’s current environment—marked by enduring tensions with Pakistan and growing strategic competition with China—has elevated defence from a cyclical, event-driven sector to a structural growth story. As Charanjit Singh, fund manager at DSP Mutual Fund, notes, the sector is evolving “from a cyclical industry tied to budget cycles and geopolitical events into a strategic growth sector with sustained, predictable expansion.”
India’s Strategic Goals and the Defence Mandate
India’s pursuit of a permanent seat on the United Nations Security Council has given added impetus to the expansion and modernization of its defence sector. As Kranthi Bathini, director of equity strategy at WealthMills Securities, observes, “One of the key requirements for being a member of this elite club is that the country should be strong in defence. A powerful defence sector, therefore, is among the key strategic goals for India.”
Mapping the Global Arms Landscape: India’s Position
India has long been among the world’s largest importers of arms, accounting for 9.8% of global imports between 2019 and 2023, according to the Stockholm International Peace Research Institute (SIPRI). While the war in Ukraine has, for now, vaulted that country to the top of the arms import rankings, India remains a major player, ranking second globally since 2000 with an 8.3% share of total imports.
In 2024 alone, India was the world’s fifth-largest military spender, with a total outlay of $86.1 billion—an increase of 1.6% over 2023 and a 42% jump since 2015. With a standing army of approximately 1.5 million personnel, India is home to the world’s second-largest military force.
Government Vision: Transforming India into a Defence Export Powerhouse
Recognizing the need to reduce import dependence and build indigenous capabilities, the Indian government has set its sights on transforming India from a major arms importer into a global defence manufacturing and export hub. Defence Minister Rajnath Singh recently announced that India’s defence production is expected to surpass ₹1.6 trillion this year, with a target of reaching ₹3 trillion by 2029. Defence exports have also hit a record high of ₹23,622 crore in 2024–25, with the government aiming for ₹50,000 crore in exports by 2029.
The pace of this transformation is nothing short of remarkable. In 2013–14, India’s defence exports were a mere ₹686 crore, representing a 34-fold increase in just over a decade. Today, India exports a diverse range of defence goods—including ammunition, weapons, subsystems, and components—to nearly 100 countries.
Budgetary Support and Policy Reforms: Fueling Sector Growth
The union budget for 2025–26 has allocated ₹6.8 trillion for defence, a 9.53% increase over the previous year and the highest allocation among all ministries, representing 13.45% of the total union budget. This financial commitment is complemented by a series of bold policy measures:
- Defence Corridors: Two dedicated defence industrial corridors have been established in Uttar Pradesh and Tamil Nadu to boost domestic manufacturing and exports.
- Indigenisation Lists: The government has issued procurement lists that prioritize domestic suppliers, fostering local industry growth.
- FDI Reforms: The foreign direct investment (FDI) limit in defence has been raised to 74% via the automatic route and up to 100% via government approval.
- Agnipath Scheme: This initiative aims to reduce the pension burden and free up capital for modernisation and equipment.
Collectively, these measures have catalysed the growth of a vibrant domestic defence ecosystem, spanning advanced platforms such as the Dhanush artillery system, Arjun main battle tank, LCA Tejas fighter aircraft, Akash missile system, and a host of naval assets including destroyers, aircraft carriers, and submarines.
Today, India’s defence industrial base includes 16 defence public sector units (DPSUs), over 430 licensed private sector companies, and approximately 16,000 micro, small, and medium enterprises (MSMEs).
The Indigenisation Drive: Progress and Remaining Challenges
While India has made significant strides in indigenising its defence procurement—now manufacturing around 65% of its defence equipment domestically, compared to importing 65–70% just a decade ago—there remains considerable scope for growth. According to Nuvama, India’s defence spending stands at about 2% of GDP, well below the 3–5% typically allocated by global defence majors.
To achieve the dual objectives of meeting vast domestic needs and becoming a top-tier exporter, India must continue upgrading its manufacturing value chain and technological capabilities. The sector has thus evolved into a structural, long-term investment theme.
Structural Growth: Sector Outlook and Key Drivers
The consensus among industry leaders is that the defence sector is no longer a short-term, event-driven play. As Pranay Aggarwal, director and CEO of Stoxkart, puts it, “The defence sector is becoming a strong long-term theme, not just a short-term trend. The latest Indo-Pak tensions will lead to higher defence spending and a big push for self-reliance. Policies like Make in India and Atmanirbhar Bharat are driving local manufacturing, expanding exports, and leading to the adoption of advanced tech like drones and artificial intelligence (AI).”
Projected Capital Outlay and Sectoral Preferences
In its latest sector report, Nuvama forecasts that India’s defence capital outlay will grow by 7–8% annually over the next five years, translating into procurement expenditures of over $130 billion (₹11.1 trillion) during this period. The majority of spending is expected to be directed towards the Air Force and Navy due to ongoing modernization and major new procurement programmes.
Notably, private defence companies are projected to outperform their public sector counterparts over the next five years. Nuvama expects private companies’ earnings per share (EPS) compound annual growth rate (CAGR) to be in the range of 25–40%, significantly higher than the 15–18% projected for defence public sector undertakings (DPSUs). This anticipated outperformance is attributed to the increasing localization of high-tech manufacturing, greater private sector participation, and the fostering of joint ventures and technology transfer partnerships with global original equipment manufacturers (OEMs), all of which are expected to alleviate supply chain bottlenecks and drive innovation.
Defence Electronics: The High-Growth Sub-Segment
Within the broader defence sector, defence electronics stands out as a particularly attractive sub-segment. Nuvama estimates that this area will grow 1.5–2 times faster than the overall defence budget outlay over the next five years, propelled by major modernization efforts in the Air Force and Navy. As India focuses on developing indigenous capabilities for radar systems, advanced communication equipment, and electronic warfare, domestic companies specializing in these technologies are poised for considerable growth.
Naval Modernisation: Shipyards Set to Benefit
A major pillar of India’s defence modernization is the expansion and technological advancement of the Indian Navy. This has significant implications for listed shipyards such as Mazagon Dock Shipbuilders, Cochin Shipyard, and Garden Reach Shipbuilders. While the combined order book for these shipyards has remained largely stagnant since 2018–19—mainly due to delays in new orders (including Project 751 for six new submarines and a second indigenous aircraft carrier) and the completion of earlier large projects—the landscape is rapidly changing.
The Defence Acquisition Council (DAC) has approved orders worth ₹8.45 trillion between 2021–22 and 2024–25—almost 3.3 times the total for the previous comparable period. This is expected to translate into significant order inflows in 2025–26 and 2026–27, with large contracts anticipated for six submarines under Project P75I, three Kalvari-class submarines, next-generation corvettes, P-17B frigates, and a range of smaller vessels.
Stock Market Performance: Boom, Correction, and Outlook
The Indian defence sector has been one of the most prominent beneficiaries of the post-pandemic bull market. The Nifty India Defence Index delivered a remarkable three-year return of 435%, making it one of the best-performing sectors in the country. However, such rapid gains inevitably led to a correction. From July 2024 to March 2025, defence stocks saw significant profit-taking and a cooling of valuations, reflecting concerns over stretched price-to-earnings ratios and a natural market adjustment.
Despite this correction, the sector has experienced a renewed wave of demand following Operation Sindoor. This raises an important question for retail investors: is now the right time to enter, or should one wait for further corrections?
Valuation Challenges: Navigating Market Cyclicality
While the defence sector itself is increasingly viewed as a long-term structural growth story, the stocks within the sector can still display cyclical behaviour in the short to medium term. Kranthi Bathini from WealthMills Securities points out that while defence as a sector isn’t inherently cyclical, its stocks often display cyclical patterns in the short to medium term. Therefore, investors should pay close attention to valuations, regardless of how compelling the sector appears.
A telling example is HAL. The stock, which traded at ₹900 in May 2022, soared to ₹5,600 by July 2024, representing an eye-popping 520% return in just over two years. However, the stock has since declined roughly 10% from its highest point, a downturn that occurred as its price-to-earnings (P/E) ratio soared to a record 49 in July 2024.
Many other defence stocks saw their price multiples reach record levels in mid-2024, leading to subdued performance in the following months. Charanjit Singh of DSP Mutual Fund highlights that the Nifty India Defence Index has climbed almost 39% since March 2025, significantly outperforming the wider market. This robust growth is driven by a healthy order pipeline, government-led indigenization initiatives, and increased involvement from private companies. However, the valuations have stretched significantly.”
He stresses the importance of caution, noting that the defence index is now valued at a forward price-to-earnings (P/E) ratio of about 57–61—well above historical norms and other industries. While the sector’s long-term prospects remain strong, investors should be wary of inflated valuations and resist the urge to buy at market highs. Instead, it’s wise to wait for corrections or price dips before making or increasing investments.
High Valuations and the Opportunity-Risk Balance
Some analysts argue that, in high-growth sectors, P/E ratios should be interpreted in the context of potential, not just current earnings. Bathini points to PTC Industries, which trades at a P/E of 400—a figure that would typically make it a “hard avoid.” However, PTC Industries manufactures critical engineering components for defence, aerospace, and other high-tech sectors, specializing in working with advanced metals like titanium and zirconium. These capabilities are difficult to replicate and give the company a unique position in the value chain.
Nevertheless, Bathini stresses that such high P/E multiples also carry substantial risk, and retail investors should approach them with great caution. For most, the best strategy is to focus on established leaders with proven track records.
Smart Investing: Strategies for Gaining Defence Exposure
For investors looking to participate in India’s defence growth story, the consensus is clear: stick with quality, proven leaders. Companies like HAL, BEL, Cochin Shipyard, and Bharat Forge have consistently demonstrated strong order books, government contracts, technological prowess, and export potential.
As investors gain experience and sector expertise, there is potential to explore mid- and small-cap companies, especially when valuations become attractive. However, due diligence is key—especially in sub-segments like drones, where hype often eclipses substance. Bathini cautions that investors often rush to purchase any company associated with the word ‘drone,’ without verifying whether it produces drones for agriculture or actual defence use. While the industry offers significant growth potential, he stresses the importance of assessing each company’s execution and performance.
Stoxkart’s Pranay Aggarwal echoes this view, recommending a focus on companies with large order books, government contracts, strong export potential, or leadership in high-tech areas like defence electronics. He also highlights the benefits of sector-focused mutual funds, which offer diversification and professional management—particularly appealing for those less familiar with the sector’s intricacies.
The Road Ahead: Policy Momentum and Technological Innovation
India’s defence sector is poised for sustained expansion, driven by a convergence of supportive policies, robust budget allocations, rapid technology adoption, and an expanding export footprint. The ongoing indigenization push—under initiatives like Make in India and Atmanirbhar Bharat—is transforming the sector from an import-dependent laggard into a world-class manufacturing hub.
The country’s growing prowess in advanced technologies—including radar, electronic warfare, naval platforms, and aerospace materials—signals a bright future for both established companies and innovative new entrants. As India forges more joint ventures and technology partnerships with global leaders, the sector’s technological depth and global competitiveness are set to increase further.
Key Takeaways for Investors
- Defence is now a structural, not just cyclical, growth sector—fueled by geopolitics, policy reforms, and technological progress.
- Valuations matter: While long-term prospects are strong, investors should avoid overpaying and instead look for entry points during market corrections.
- Quality leaders and diversification are critical: Focus on companies with strong fundamentals and consider mutual funds for diversified exposure.
- Check fundamentals, not just narratives: Avoid getting swept up in hype, especially in emerging sub-segments like drones.
- Monitor policy and order flow: Track government procurement announcements, new defence contracts, and export milestones for investment signals.
Conclusion: Defence as a Cornerstone of the New India Story
India’s defence sector is undergoing a structural transformation—emerging as a cornerstone of the country’s economic, strategic, and technological future. For investors, the sector promises both resilience and growth, but also demands prudent analysis and careful stock selection. With the right approach, defence can play a central role in building a robust, future-ready investment portfolio—proving that in a world shaped by geopolitics, strategic sectors deserve strategic thinking.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Please consult a financial advisor before making any investment decisions.
