Defence Stocks
Shares of Indian defence and shipping companies, including Garden Reach Shipbuilders & Engineers (GRSE), Cochin Shipyard, and Hindustan Aeronautics Ltd (HAL), witnessed a significant rally of up to 20% on Wednesday. This surge was driven by a broad-based recovery in the domestic equity market and positive global developments in the defence sector.
Global Factors Driving the Rally
The immediate trigger for this upward momentum was the recent decision by German lawmakers to increase infrastructure and defence spending. This step reflects Europe’s growing focus on military expansion in response to rising geopolitical tensions, particularly the ongoing conflict in Ukraine and broader regional security concerns. This shift has opened up new opportunities for Indian defence companies, which are well-positioned to meet the growing demand for defence equipment at competitive prices.
Nifty India Defence Index Climbs 6%
The positive sentiment was reflected in the Nifty India Defence Index, which surged nearly 6% intraday on March 19. Most major sectors were in positive territory, with the exception of IT and FMCG. Investors have shown renewed confidence in the defence sector, considering the strong order pipeline and improved revenue visibility for key players.
Krishna Appala, Senior Analyst at Capitalmind Research, highlighted that European nations face challenges in expanding their defence production capacity after years of reduced manufacturing. Indian companies are emerging as attractive suppliers due to their ability to produce equipment at scale and competitive costs, similar to the successful model of South Korean firms.
Performance of Leading Defence Stocks
- GRSE hit the 20% upper circuit at ₹1,641.35 on the NSE, marking its fourth consecutive day of gains.
- Cochin Shipyard touched a 10% upper circuit during intraday trading, reaching ₹1,474.95 before paring some of its gains.
- Hindustan Aeronautics gained 5.16%, while Mazagon Dock Shipbuilders saw a sharp rise of 10.96%.
Fundamentals Behind the Growth
The surge in defence stocks is not just driven by short-term market sentiment. Strong order backlogs, improving revenue visibility, and growing defence exports have created a solid foundation for long-term growth. Indian defence exports witnessed a remarkable 32.5% increase in the last financial year, reinforcing investor confidence.
Appala explained, “Companies with robust in-house development capabilities and a focus on shipbuilding, artillery, and electronics are in a strong position to secure large international contracts. Additionally, increasing domestic defence spending further supports the sector’s growth outlook.”
Valuation Concerns Amidst High Growth
Vikas Gupta, Smallcase Manager and Founder of Omniscience Capital, cautioned that while the Nifty India Defence Index has seen strong growth, its valuation remains high. “The index PE had reached 65 at its peak, and even now, it stands around 42, which is elevated even for high-growth companies. Investors need to be mindful of overvaluation while considering long-term investments,” Gupta noted.
Outlook for Indian Defence Sector
The ongoing geopolitical tensions and increasing global military spending are expected to keep the Indian defence sector in focus. With Indian companies positioned as reliable suppliers for both domestic and international markets, the sector holds strong potential for future growth. However, investors are advised to adopt a balanced approach, considering both growth opportunities and valuation levels.
