The ongoing war between Iran and Israel-US rekindled hopes for better investor sentiment and export order wins for these defence companies. The index gained nearly 3% on Thursday. Mazagon Dock Shipbuilders, Data Patterns (India), GRSE and Cochin Shipyard shares were among the top gainers, rising up to 9%. This came after a US submarine sank an Iranian warship by a torpedo in the Indian Ocean, boosting sentiment for these stocks.
Recent ups and downs in defence stocks
The defence stocks had rallied sharply in 2025, with Nifty India Defence index rising nearly 83% in just three months from March 2025 to hit a record high of 9,195 in June 2025. This came as investor sentiment was boosted after Indian armed forces conducted targeted operations against terrorist outfits in Pakistan and Pakistan Occupied Kashmir (POK) under the codename ‘Operation Sindoor’. While the ‘josh’ remained high, analysts repeatedly warned about stretched valuations.The predictions did come true and the defence stocks fell like a pack of cards later as profit booking took charge from the bulls. The index declined up to 21% from the record high level to nearly 70,000 towards the close of 2025. However, geopolitical tensions and global war threats never completely ended, providing support to defence stocks. The index has gained more than 7% in 2026 so far, but heavyweight stocks are down. BDL shares have declined 13.5% in 2026 so far, while HAL and BEML shares are down around 11%. Cochin Shipyard shares have fallen more than 10% so far this year, while Mazagon Dock Shipbuilders shares fell nearly 5%.
Given the evolving geopolitical landscape and increasing global conflicts, defence preparedness has become a strategic priority for many countries, said Putta Ravi Kumar, Defence Analyst at Choice Institutional Equities. He added that this is likely to drive sustained demand for advanced defence systems, particularly in areas such as air defence such as (QRSAM, MRSAM, LRSAM, BARAK-8, etc.), missile systems and electronic warfare.
“Within the listed space, companies with strong exposure to missile systems, radar technologies, and defence electronics are well positioned to benefit. In our view, Bharat Electronics Limited, Bharat Dynamics Limited, and Data Patterns (India) Limited remain key beneficiaries, given their technological capabilities, strong order pipelines, and increasing participation in both domestic and export-oriented defence programs,” according to the analyst.
Structurally strong despite market volatility
India’s defence sector continues to remain structurally strong despite volatility in the broader equity markets, said Harshal Dasani, Business Head, INVasset PMS. The analyst noted that the Union Budget for 2026-27 had allocated approximately Rs 7.85 lakh crore towards defence spending, marking one of the largest defence budgets globally and reflecting India’s continued focus on military modernisation.
“A significant portion of this allocation is directed toward capital procurement, with emphasis on indigenous manufacturing under the Atmanirbhar Bharat initiative. Over the past few months, the Ministry of Defence has also cleared multiple procurement proposals covering aircraft, naval systems, missile platforms, and electronic warfare equipment, reinforcing a strong multi-year order pipeline for domestic defence manufacturers. The government has also set an ambitious target of Rs 1.75 lakh crore in defence production by 2026, alongside a steady rise in defence exports,” Dasani said.
From a market standpoint, defence stocks have already witnessed a sharp re-rating over the past two to three years as order books expanded and visibility on earnings improved, the analyst said, adding that global geopolitical tensions and India’s push toward strategic self-reliance have kept investor interest strong in the sector. “However, valuations in several defence companies have become relatively elevated following the rally seen since 2024, “ he said.
Naren Agarwal, CEO of Wealth1, said that the recent momentum in defence stocks reflects a structural shift rather than just a short-term reaction to geopolitical tensions. He also cited Budget’s strong push for significantly improving growth visibility for defence companies with large order books and multi-year execution pipelines.
“At the same time, rising geopolitical uncertainties across regions have historically led governments to accelerate defence spending, and markets tend to price in these expectations early. As a result, many defence stocks have already seen sharp re-rating over the past few years,”Agarwal added.
What should investors do?
“In the near term, stock performance may be more selective and driven by fresh order announcements, execution timelines, and export opportunities. Structurally, though, the sector continues to benefit from strong policy support, rising defence budgets, and sustained long-term demand for indigenous defence capabilities,” Dasani said.
While the long-term outlook remains strong due to policy support, exports and technology development, valuations in certain pockets have become demanding after the recent rally, Agarwal cautioned.
“Investors should therefore avoid chasing momentum and instead focus on companies with strong balance sheets, execution capabilities and sustainable order visibility. A staggered investment approach would be more prudent given the volatility that defence stocks can witness in the near term,” he said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)