Operation Sindoor: Booming defence stocks carry a message for investors

Mint

26-05-2025

New Delhi: To paraphrase the ancient Greek statesman and general Pericles, just because you do not take an interest in geopolitics, doesn't mean geopolitics will not take an interest in you. Or your stocks portfolio.
If the events of the last few weeks have shown us anything, it is that the real estate guys were right—it really boils down to location, location, location. India may be blessed with numerous natural advantages, but in one aspect, at least, it has been dealt with a particularly harsh hand—its neighbourhood.
India's neighbours comprise, in no particular order, a military dictatorship masquerading as a functioning country; the world's largest one-party dictatorship itching to take over the entire globe; an aspiring Islamic theocracy; and a perpetually unstable parliamentary republic which cannot let go of its monarchical past. Bang in the middle sits India, the world's biggest democracy and the fastest-growing major economy.
In such a situation, few things are amply clear. Firstly, in a neighbourhood like India, geopolitical flare-ups should be considered the norm, not the exception. And second, shoring up India's defence capabilities is non-negotiable, and will take massive investments spanning years, if not decades.
Which brings us to the point of view of investing. For India's growing multitude of retail investors, has the time come to accord the defence sector the same importance given traditionally to banking, information technology (IT), and fast-moving consumer goods (FMCG)?
Cyclical to strategic
Defence stocks roared back to life in the aftermath of India's Operation Sindoor, which was launched on 7 May, targeting terror camps in Pakistan and Pakistan-occupied Jammu and Kashmir. The operation was to avenge the Pahalgam terror attack on 22 April, which left 26 people dead.
Shares of defence companies like Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics, Bharat Forge, BEML, Garden Reach Shipbuilders and Mishra Dhatu Nigam surged more than 10% in the week following the start of military hostilities. Many counters are trading with gains of up to 40% since Operation Sindoor.
Fad-chasing aside, experts say participants making a beeline to the sector does have an economic rationale.
'Past conflicts, such as Uri, Pulwama, and notably the 1962 war, have historically triggered significant increases in defence spending, with the 1962 war doubling defence expenditure from 2% to 4% of GDP and catalysing India's nuclear programme," Charanjit Singh, fund manager at DSP Mutual Fund, told Mint.
India's growing defence expenditure and strong push towards indigenization amid ongoing tensions with Pakistan and strategic challenges from China means the sector can no longer be considered peripheral to the India story.
'We believe the defence sector is evolving from a cyclical industry tied to budget cycles and geopolitical events into a strategic growth sector with sustained, predictable expansion," Singh said.
Operation Sindoor might have reignited interest in defence names, but some experts have been bullish on this theme for a long time.
'The reason is simple. India has made a strong pitch to become a permanent member of the UN Security Council. 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," Kranthi Bathini, director of equity strategy at WealthMills Securities, said.
Mapping the battleground
India was the world's biggest arms importer during 2019–23 with a 9.8% share of all arms imports, according to global security think-tank Stockholm International Peace Research Institute (SIPRI). However, Ukraine took the top spot for the period 2020–24, with its imports increasing nearly 100 times compared with 2015–19, thanks to the Russian invasion. With an 8.3% share of global arms imports between 2000 and 2024, India was the second-largest importer.
If we consider just 2024 alone, India was the fifth biggest military spender in the world at $86.1 billion—up by 1.6% from 2023 and 42% from 2015. With around 1.5 million active personnel, India also boasts of the second-largest standing army in the world.
The government has set out an ambitious vision to transform India from a major arms importer to a homegrown defence powerhouse which will also cater to global demand.
At an event in the capital last month, defence minister Rajnath Singh said that India's defence production is expected to exceed ₹1.6 trillion this year, as he reiterated the government's target of reaching ₹3 trillion by 2029. At the same time, the country's defence exports reached a record ₹23,622 crore in 2024–25. The government's aim is to take this number to ₹50,000 crore by 2029.
Perhaps nothing exemplifies the speed and scale of transformation of this sector than this simple stat—in 2013-14, India's defence exports stood at a paltry ₹686 crore. This translates to a whopping 34-fold jump in just over a decade. The country now exports a wide array of defence goods, including ammunition, weapons, systems/subsystems, and components, to around 100 countries.
The union budget has made a provision of ₹6.8 trillion for the defence sector for 2025-26. This is 9.53% more than the budgetary estimate of 2024-25 and stands at 13.45% of the union budget, which is highest among all the ministries. In tandem with the increasing budgetary allocations, the Modi government's 'Make in India' push and policy overhauls are also giving the sector a much-needed boost.
The policy measures include setting up two 'defence corridors' in Uttar Pradesh and Tamil Nadu to drive indigenous manufacturing and promote exports; issuance of indigenisation lists, under which the notified goods are procured only from domestic suppliers; enhancement of the foreign direct investment (FDI) limit to 74% (automatic route) and up to 100% (government route); the Agnipath scheme, which seeks to reduce the pension burden and free up funds for defence capital expenditure.
All these efforts have led to the mushrooming of a vibrant domestic ecosystem in the defence sector. They include advanced military platforms like the Dhanush artillery gun system, advanced towed artillery gun system, main battle tank Arjun, light combat aircraft (LCA) Tejas, advanced light helicopter, light utility helicopter, Akash missile system, weapon locating radar, 3D tactical control radar, and software defined radio among others. In the naval sphere, the country has started manufacturing assets like destroyers, indigenous aircraft carriers, submarines, frigates, corvettes, fast patrol vessels, fast attack craft, and offshore patrol vessels.
India's defence industrial base includes 16 defence public sector units (DPSUs), more than 430 licensed companies, and approximately 16,000 micro, small, and medium enterprises.
The country, which used to import about 65-70% of its defence equipment needs, is now seeing around 65% of defence goods being manufactured within the country. However, there's still a long way to go. India's defence spending, at around 2% of GDP, is lower than global defence majors (3–5% of GDP), according to domestic brokerage house Nuvama.
The twin goals of meeting India's huge domestic demand and emerging as a top exporter of defence equipment will entail a massive upgrade of the country's manufacturing value chain. It also means the sector is far too important to be treated as a transient 'ride-the-rally' opportunity by investors.
'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)," Pranay Aggarwal, director and CEO of Stoxkart, a discount brokerage firm, said.
Big guns
In a report last month, Nuvama said it expects India's defence capital outlay to grow 7–8% annually over the next five years, translating into procurement of over $130 billion (about ₹11.1 trillion) during this period.
'Air Force and Navy would account for the bulk of it due to the need for modernization drives for their arsenals and larger programmes/systems… This makes up a substantial part of DPSUs' pipeline of ~ ₹8.7 trillion," it stated.
It also has a clear preference in the sector. 'We reckon private defence companies' earnings per share (EPS) CAGR of 25–40% shall beat hands down the defence public sector undertakings' EPS CAGR of 15–18%. High-tech defence manufacturing in the country is likely to improve over coming decades as domestic production ramps up (localization efforts) spurred by greater focus on joint ventures/transfer of technology partnerships with foreign original equipment manufacturers for de-bottlenecking supply chains," Nuvama added.
Within the sector, it prefers the sub-segment of defence electronics, which it projects will grow 1.5–2x of defence budget outlay over the next five years. This is due to the major modernization efforts underway, especially in the Air Force and Navy.
The expansion and modernization of the Indian Navy will give a huge fillip to listed defence shipyards like Mazagon Dock Shipbuilders, Cochin Shipyards and Garden Reach Shipbuilders. The combined order book of these three major defence shipyards has remained stagnant since 2018-19 even though their combined revenue has increased from ₹8,900 crore in 2018-19 to ₹12,400 crore in the first nine months of 2024-25, Antique Stock Broking highlighted in a note. This was mainly due to delay in placing of new orders (including Project 751 for the acquisition of six submarines, and a second indigenous aircraft carrier), coupled with the completion of major orders placed between 2010 and 2020.
Nevertheless, the Defence Acquisition Council (DAC) has approved orders worth ₹8.45 trillion between 2021-22 and 2024-25, which is almost 3.3 times the same number for 2018-19 and 2020-21, the Antique report stated.
'We expect this to translate into significant order inflows in 2025-26–2026-27. We see large orders being placed, led by the ordering of six submarines under P75I, three Kalvari-class submarines, next-generation corvettes, and P-17B frigates, besides a host of smaller vessels," the brokerage stated.The expansion and modernization of the Indian Navy will give a huge fillip to listed defence shipyards like Mazagon Dock Shipbuilders, Cochin Shipyards and Garden Reach Shipbuilders.
Stock strike
Defence has been among the most conspicuous segments of India's post-covid bull run. The Nifty India Defence Index has delivered a three-year return of a mind-boggling 435%. However, as is expected of any overheated part of the market, defence stocks saw a significant correction during July 2024 to March 2025.
With these stocks seeing a renewed wave of demand after Operation Sindoor, does it make sense for retail investors to enter now?
'The defence sector may not be cyclical, but the stocks will definitely behave that way, at least in the short to medium term. So one has to be mindful of the valuations, no matter how attractive the business opportunity might seem," WealthMills Securities' Bathini said.
A case in point is HAL—among the most prominent plays on the defence theme. The stock, which was trading at ₹900 levels in May 2022, shot up to ₹5,600 by July 2024—an astounding 520% return in a little over two years. However, the stock is currently down 10% from its July 2024 peak. This coincided with its price-to-earnings (P/E) ratio reaching an all-time high of 49 in July 2024.
The P/E ratio measures a company's share price relative to its earnings per share.
A host of defence stocks saw their price multiples reach record levels in mid-2024, which has translated into lacklustre performance since then.
'The Nifty India Defence Index has surged nearly 39% since March 2025, far outpacing the broader market. This impressive rally is backed by a strong order book, government reforms promoting indigenization, and growing private sector participation. However, the valuations have stretched significantly," DSP Mutual Fund's Singh said.
He pointed out that the defence index is currently trading at a high price to equity (P/E) multiple of around 57-61 times forward earnings, which is quite elevated compared to historical averages and other sectors. 'While the long-term growth story is intact, we have to be mindful of stretched valuations and avoid chasing these stocks at peak valuations. We should wait for market corrections or dips to build or add to positions," he added.
Some experts, however, have a different take on valuations in a fast-growing sector.
'P/E can be interpreted in another way—as an indicator of the opportunity present before a firm. For example, look at PTC Industries, which trades at a P/E of 400, which by conventional logic is a 'hard avoid'," said Bathini. 'However, the company makes critical engineering components for defence, aerospace and other sectors. Its specialization of working with reactive metals like titanium and zirconium makes it an integral part of the manufacturing value chain which is not easy to replicate. But yes, high P/E also carries a high degree of risk, which should be avoided by the vast majority of retail investors," he added.
He advises investors to keep it simple. 'The best way to take an exposure in defence is to stick to proven leaders like HAL, BEL, Cochin Shipyard, etc. As you go along and develop some expertise, you can venture into the mid- and small-cap space, given the right valuations."
Also, be aware of narratives overtaking numbers.
'I see a lot of froth in defence sub-segments like drones. People just hear the word 'drone' and are ready to buy any company, without bothering to check if it makes drones for agricultural purposes or defence. Yes, the sector has a long runway for growth, but we must keep track of the company's execution as well," Bathini said.
Stoxkart's Aggarwal echoed the views, saying investors should stick to companies with large order books, government contracts, strong export potential, or leadership in high-tech areas like defence electronics.
'PSUs like HAL and BEL are well-established, while private players like L&T and Bharat Forge are growing fast. Defence mutual funds are a good option for those who prefer diversification and expert management, especially given the sector's evolving nature," he said.