Defence stocks detonate in Rs 1.8 lakh crore boom. Is a ceasefire on the charts?

Economic Times

19-05-2025

ETMarkets.com Investors are betting that the government will respond to the success of indigenous weaponry on the battlefield with a fresh barrage of defence orders.
With investors expecting a fresh wave of orders in the wake of Operation Sindoor , where India's indigenous missiles and desi drones danced past Pakistan's radars while our own airspace stood shielded with clinical precision, defence stocks have rallied by a jaw-dropping Rs 1.8 lakh crore from May 9.
Drone-maker ideaForge Technology has led the sortie, soaring 56% (from May 8), while warship-builders Cochin Shipyard and GRSE have cruised ahead with 41% and 40% gains from May 9, respectively.
Investors are betting that the government will respond to the success of indigenous weaponry on the battlefield with a fresh barrage of defence orders. The situation also opens a new frontier: exports.
The numbers back the optimism. Alongside ideaForge's 56%, Mishra Dhatu Nigam, Zen Technologies, Paras Defence, and Data Patterns have all jumped over 30%. Defence PSU heavyweight HAL, the maker of Tejas jets and Dhruv helicopters, is up 16%.
But for those tracking the sector's longer arc, the Sindoor spark is just the latest chapter. Between July 2022 and July 2024, the Nifty Defence index clocked a blistering 350% rally, only to crash 38% by February 2025 as markets turned cautious. Operation Sindoor has now reignited that fire—and how.
Also read | Markets don't lie! Stock tickers in Shenzhen, Mumbai expose Pakistan's claims of victory
According to Sanjeev B Zarbade of Antique, 'We continue to be positive on the Indian defence shipyards sector given strong order outlook, a robust policy framework favouring indigenisation, and substantial government investment.' Zarbade points to the Rs 8.45 lakh crore in Defence Acquisition Council (DAC) approvals between FY22–25, which is over 3.3x the amount cleared in the previous three years.The coming years could be flush with even bigger orders. 'We expect significant order inflows in FY26–27 for defence shipyards,' Zarbade said. The pipeline includes eight next-gen destroyers under Project 18 worth Rs 800 billion, and 12 submarines under Project 76 that could cost Rs 1,200–1,500 billion. India is also expected to firm up plans for a third aircraft carrier by 2028, with deployment eyed for 2038.
Brokerage Jefferies has loaded up on optimism, maintaining Buy ratings on HAL (target Rs 4,715), Data Patterns (Rs 2,690), and BEL (Rs 325). The house expects robust double-digit EPS growth and strong capital efficiency, backed by the defence capex pipeline. But even as the cannons boom, some see smoke signals.Ashwini Shami, EVP and Senior Portfolio Manager at OmniScience Capital, warned that valuations have gone into combat mode. 'The Nifty India Defence index has rallied more than 60% from the Feb 25 bottom and currently trades at a P/E of 61,' Shami said, comparing it to the overheated July 2024 levels when the index traded at 73x earnings before a 38% fall. 'From a long-term horizon, we continue to believe in the defence theme as a potentially high-growth opportunity. We expect the defence budget to continue to expand, and the Indian defence players continue to enhance their capabilities across land, air, sea, and cyber domains. We believe in having a broad-based approach to take exposure to the defence theme. We find reasonable valuations in some of the DPSUs, strategic resource companies and select engineering & logistics firms. From a long-term investment viewpoint, follow valuation discipline, ignore hysteria and avoid momentum traps,' he said.
Also read | War drums with Pakistan may force FIIs to hit brakes after Rs 50,000 crore buying spree Geojit's Anand James flagged technical exhaustion as well. 'The average daily RSI has surged past 70, entering the overbought zone. Stocks like GRSE, Mazagon Dock, Data Patterns, and BDL could be vulnerable to profit booking,' he said, though he noted that Cochin Shipyard and BEL could benefit from sectoral rotation.
Speaking of Cochin Shipyard, not everyone is sold on its rally. Kotak Institutional Equities, in a notably cautious note, maintained a Sell rating. 'Cochin Shipyard results came in line, but the lack of naval orders remains a concern,' Kotak said. 'Ship repair orders for INS Vikrant and Vikramaditya have been key to CSL's performance, but these contracts are one-time in nature.' The firm added that possible tie-ups with global names like Maersk or Drydocks World could act as a catalyst, but for now, it has pegged the fair value at Rs 850. So, where does this leave investors? Trapped in the crossfire between explosive optimism and valuation anxiety.
The fundamentals remain formidable: A rising defence budget, Make-in-India momentum, and the geopolitical necessity of arming smarter and faster. But as always in the markets, even the sharpest weapons can misfire when fired at the wrong price. As Shami summed up: 'Follow valuation discipline. Ignore hysteria.'
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)