India's Defence Sector Rises Amidst Global Tensions: A Deep Dive for Investors

The echoes of geopolitical tensions, particularly the recent escalation between Israel and Iran, have sent ripples across global markets, and India's defence sector has distinctly felt the surge. As the conflict entered its fifth day, Indian defence stocks witnessed a notable rally, with the Nifty India Defence Index climbing past the 9,000 mark. This isn't just a fleeting moment; it's a reflection of a deeper trend shaping the future of India's defence industry.

Leading the Charge: Who's Gaining Ground?

On Tuesday, the spotlight shone brightly on several key players. Mazagon Dock Shipbuilders emerged as a top performer, experiencing a robust surge of over 5%. Not far behind, Garden Reach Shipbuilders & Engineers saw its shares jump by more than 4%, while Data Patterns (India) advanced over 3%. The momentum wasn't limited to these heavyweights; Bharat Dynamics, Cochin Shipyard, Solar Industries India, BEML, and Hindustan Aeronautics (HAL) all registered healthy gains, rising between 1% and 2%.

While the broader trend was undeniably positive, a few companies, namely Zen Technologies, Mishra Dhatu Nigam, and Astra Microwave Products, bucked the trend with marginal dips.

The Underlying Drivers: Why the Sudden Interest?

The renewed investor confidence in defence stocks isn't merely a knee-jerk reaction to current events. It's fueled by a potent combination of factors. The most immediate catalyst is the expectation of increased defence spending and a significant uptick in order inflows as global security concerns mount. The intensification of the Israel-Iran conflict, for instance, has undeniably heightened market anticipation for greater demand for defence equipment and services.

This isn't a new phenomenon for the sector. Defence stocks had already gained traction recently following India's targeted military strikes in Pakistan under "Operation Sindoor." Even though tensions with Pakistan have since eased, the prolonged Russia-Ukraine conflict continues to provide a strong undercurrent of bullish sentiment for the sector. The latest developments in the Middle East have simply added another layer of conviction, reinforcing the outlook for sustained growth in defence orders and strategic investments.

A Sector on an Upward Trajectory

The numbers speak for themselves. India's defence sector has been on an impressive ascent, with its market capitalization hitting an all-time high in May 2025. Between FY19 and May 2025, the sector recorded a phenomenal Compound Annual Growth Rate (CAGR) of 55%, with aggregate Profit After Tax (PAT) reporting a healthy 23% CAGR.

The quarter ending March 2025 further underscored this positive trend. Defence companies delivered strong performances, largely driven by improved project execution, a direct result of the government's steadfast push for defence indigenization. This focus on domestic manufacturing has also contributed to significant improvements in EBITDA margins, reflecting enhanced operational efficiencies across the board.

What Lies Ahead: Expert Outlook

The future appears bright for India's defence sector, primarily due to the government's unwavering commitment to indigenization. This focus on 'Make in India' for defence is a significant tailwind for domestic manufacturers. Moreover, the heightened geopolitical tensions witnessed recently have prompted emergency procurement measures by the government, an initiative that is expected to translate into incremental orders for defence companies in the near term.

"Defence stocks look promising due to the ongoing geopolitical tussle between Iran and Israel," notes Sankhanath Bandyopadhyay, Economist at Infomerics Valuation and Ratings Ltd. He adds, "Moreover, the Indian government is likely to enhance defence spending from the current ~2% of GDP to 3% – 4% over the next decade. Further, the government has targeted ₹25,000 crore in defence exports by 2025–26. Investors can focus on export-driven defence stocks with long-term potential." Bandyopadhyay advises a careful assessment of financials and a judicious mix in portfolios to ensure healthy dividend potential.

However, it's crucial for investors to exercise caution. Some analysts have flagged valuation concerns following the recent sharp rally. Avinash Gorakshakar, Head of Research at Profitmart Securities, observes, "While defence stocks such as Garden Reach Shipbuilders & Engineers, Mazagon Dock Shipbuilders, HAL, BEL, and BDL remain attractive from a long-term perspective, current valuations appear stretched. The recent uptrend is largely driven by sentiment and prevailing geopolitical narratives." He suggests accumulating these stocks with a long-term horizon of at least two years.

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments, echoes the sentiment about long-term prospects, particularly in light of potential increased defence outlays after recent geopolitical events. However, he also highlights the valuation concern, stating, "All the good news is already in the price." He further points out a unique dynamic: "Another concern is that the expectation of high profits from the sector may not materialise since the government owns most companies in the sector and the government is the only buyer. This preempts very high profits which the market appears to be discounting. Those companies catering to exports are better placed."

In conclusion, India's defence sector is experiencing a period of significant growth, fueled by both global geopolitical shifts and strong domestic policy support. While the long-term outlook remains positive, investors are encouraged to conduct thorough research and consider the nuances of valuation before making investment decisions in this dynamic and strategically important sector.