Defence Stocks Add ₹1.8 Lakh Crore Post-Rally as Valuation Concerns Emerge

Indian defence stocks have witnessed a significant surge, adding ₹ 1.8 lakh crore to investor wealth since May 9. This boom follows India's recent military actions, dubbed 'Operation Sindoor', which reportedly showcased the capabilities of indigenous defence systems.

Operation Sindoor and Market Reaction

The market rally is largely attributed to 'Operation Sindoor', where India's domestically developed missiles and drones were said to have successfully bypassed Pakistani radar, while Indian airspace was effectively defended.

India conducted strikes on terror camps in Pakistan and Pakistan-occupied Kashmir (PoK) on May 7 as part of this operation. Investors are anticipating that the successful demonstration of indigenous weaponry on the battlefield will lead to a fresh wave of government defence orders.

This renewed investor interest comes after the Nifty Defence index experienced a blistering 350% rally between July 2022 and July 2024, followed by a 38% crash by February 2025 before the 'Sindoor spark' reignited the sector. The Nifty Defence index recorded its seventh consecutive gain on May 19, rising 3% to hit a day's high, resulting in a cumulative gain of 24% over the seven sessions.

Several key players have seen substantial gains:

• Drone-maker IdeaForge Technology surged 56% from May 8.
• Warship-builders Cochin Shipyard and Garden Reach Shipbuilders & Engineers (GRSE) gained 41% and 40% respectively from May 9.
• Mishra Dhatu Nigam, Zen Technologies, Paras Defence, and Data Patterns have all jumped over 30%.
• Defence PSU heavyweight HAL is up 16%.

On May 19, Data Patterns surged 2%, while Paras Defence, Zen Technologies, IdeaForge Technology, MTAR Technologies, Bharat Electronics (BEL), Apollo Micro Systems, Bharat Dynamics, Astra Microwave Products, and HAL rose by up to 5%. Mazagon Dock, BEL, and Bharat Dynamics reached record highs, with Cochin Shipyard and Mazagon Dock also hitting new highs.

Cochin Shipyard gained 8% on May 19, reaching an 8-month high, while Mazagon Dock Shipbuilders rose 6% to an all-time high. Although, as of 12:15 PM, these two stocks are trading in the negative. GRSE continued its winning streak for an eighth straight session, hitting a 9-month high and delivering 30% returns in May.

Underlying Drivers and Outlook

Beyond Operation Sindoor, the rally is underpinned by several factors:

• Strong government orders and the Make-in-India momentum.
• Expectations of increased defence spending amidst heightened tensions with Pakistan.
• Record rise in defence exports, which surged to ₹ 23,622 crore in FY24-25. The government targets annual exports of ₹ 50,000 crore by 2029.
• Robust policy frameworks favouring indigenisation and substantial government investment. Defence Acquisition Council (DAC) approvals totalled ₹ 8.45 lakh crore between FY22–25, over 3.3 times the preceding three years.

The long-term outlook for India’s defence sector remains favourable, supported by a robust pipeline of expected orders and sustained policy backing. Shipyards are anticipated to see significant order inflows in FY26–27, with major projects such as eight next-generation destroyers valued at around ₹800 billion and 12 submarines estimated between ₹1,200–1,500 billion on the radar.

Brokerages continue to maintain positive views on key defence players, projecting strong double-digit earnings growth and solid capital efficiency. The upbeat projections are underpinned by a growing defence capital expenditure pipeline, which is expected to drive momentum across segments including aerospace, electronics, and naval platforms.

Valuation Concerns and Investor Caution

India’s defence sector continues to ride a wave of investor enthusiasm, with the Nifty India Defence index soaring over 60% since its February 25 low. However, concerns over stretched valuations are beginning to surface, as the index now trades at a price-to-earnings (P/E) multiple of 61, down from a peak of 73x in July 2024, just before a sharp 38% correction.

While long-term fundamentals remain robust, driven by rising defence allocations, indigenous capability development, and strategic imperatives, analysts are cautioning investors against momentum-driven decisions.

Valuation discipline is being emphasised, with some suggesting that select public sector undertakings (PSUs), resource-linked firms, and engineering and logistics companies still offer reasonable entry points.

From a technical standpoint, signs of exhaustion are emerging. Relative Strength Index (RSI) readings across several defence counters are in overbought territory, increasing the risk of profit booking in stocks that have seen sharp run-ups.

Stocks such as GRSE, Mazagon Dock, Data Patterns, and BDL are viewed as vulnerable in the near term, while others like Cochin Shipyard and BEL may benefit from rotational flows within the sector.

Cochin Shipyard, however, remains under scrutiny. Concerns persist over the absence of new naval orders, and earlier gains from ship repair contracts are seen as non-recurring. Fair value estimates remain significantly below current market levels, though strategic tie-ups could alter sentiment.

The broader outlook for the sector reflects a blend of structural optimism and valuation caution. Investors are being advised to remain selective and avoid crowd-driven trades, even as the defence narrative continues to gain policy and market traction.