In recent months, Dalal Street has witnessed an unprecedented surge in the defence sector. It’s an exciting time as this segment has attracted investor attention, backed by government initiatives like ‘Make in India’ and ‘Aatmanirbhar Bharat’. The easing of geopolitical tensions in the Middle East and the Ministry of Defence’s approval of Rs 1.05 lakh crore worth of procurement plans have further fuelled this rally.
But is this rally sustainable, and what does it mean for investors? Let’s analyse the key drivers behind this surge and what the future may hold.
What’s Happening?
In the first half of 2025, India’s defence industry has delivered an outstanding performance, posting an impressive return of 34.82%, outperforming all other sectoral indices. During the same period, the Nifty rose by only 5.49%, while sectors like IT and Pharma struggled with declines of 12.18% and 6.43% respectively.
In the first six months, India’s defence sector has outperformed all other sectoral indices with a return of 34.8%.
This rally in the defence sector is largely driven by the strong performance of Public Sector Undertakings (PSUs) such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), and Bharat Dynamics Limited (BDL). These companies have gained investor confidence through a strong order book, consistent execution, and improved margins.
The government’s ‘Make in India’ initiative and growing emphasis on defence exports have further strengthened the sector. Additionally, deals with several countries in Africa, Southeast Asia, and the Middle East have significantly expanded the sector’s global presence in recent months.
Government Policies and Geopolitical Factors
On July 3, 2025, the Ministry of Defence’s Defence Acquisition Council (DAC) approved capital acquisition proposals worth approximately Rs 1.05 lakh crore. Under these 10 proposals, the procurement of all defence equipment and systems will be done entirely from domestic companies.
This was the first meeting of the DAC after ‘Operation Sindhur’, where the focus was on strengthening the country’s defence preparedness. This move is expected to boost both ‘Aatmanirbhar Bharat’ and military modernisation.
Additionally, easing geopolitical tensions in the Middle East and Israel’s military actions against Iran have further boosted investor interest in defence stocks. This rally reflects investor confidence in the sector’s long-term potential and the government’s ongoing defence modernisation efforts.
Performance of Defence Mutual Funds
Thematic mutual funds focused on the defence sector have also delivered impressive returns for investors. In the past three months, the Motilal Oswal Nifty India Defence ETF has returned 38.58%, while the Groww Nifty India Defence ETF and FoF registered returns of 38.48% and 38.32%, respectively. The HDFC Defence Fund, the only actively managed fund in this category, delivered a return of 30.04% and has grown 60% since its launch.
This performance reflects the growing investor interest in the defence sector, driven by themes such as indigenisation, modernisation, and rising defence exports.
What’s in It for Investors?
In H1 CY2025, defence stocks delivered outstanding performance such as Sika Interplant Systems surged 172%, Garden Reach Shipbuilders rose 85%, Mazagon Dock gained 45%, Cochin Shipyard jumped 35%, and Apollo Micro Systems ended with a strong 67% gain despite some profit booking in June.
However, according to The Times of India, Rishikesh Palve of Anand Rathi Wealth has advised investors to remain cautious. He stated that such sectors are often cyclical in nature, making it crucial to time entry and exit well, something that can be challenging for retail investors. In his view, investing based solely on the current rally may not be wise. Investors should prioritise a long-term perspective and focus on strong fundamentals.
What’s Next?
The future of the defence sector looks promising, but it depends on several factors. The government’s push for indigenisation and export growth, India’s target of reaching $5 billion in defence exports by 2025, and the recent Rs 1.05 lakh crore procurement approvals all strengthen the sector’s long-term outlook.
Additionally, according to The Times of India, NATO’s recent announcement to increase long-term defence spending globally has opened up new opportunities for Indian exporters. Several Indian companies are now part of the global defence supply chain, and analysts believe this could lead to more international orders.
*The companies mentioned in the article are for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
