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"India’s Defence Stocks Are Soaring – Here’s Why Investors Are Rushing In"

"India’s Defence Stocks Are Soaring – Here’s Why Investors Are Rushing In"


Indian retail investors are increasingly investing in defence stocks following Prime Minister Narendra Modi's emphasis on domestic arms manufacturing. This focus has caused the defence sector index to rise by nearly 56% in a single year. Large asset managers are launching specialized funds, anticipating annual growth in defence production of up to 20% through the end of the decade.


India faces security challenges along its borders, especially with China, alongside global conflicts in the Middle East and Ukraine, driving demand for weaponry both domestically and internationally. Historically, India has been a major arms importer. However, Modi's push for indigenization aims to make India a manufacturing hub by encouraging the military to procure more locally made weapons.


Major players such as Hindustan Aeronautics, Bharat Dynamics, and Mazagon Dock Shipbuilders are benefiting from increasing order volumes. Hindustan Aeronautics produces aircraft, helicopters, and jet engines; Bharat Dynamics specializes in ammunition and missiles; and Mazagon Dock Shipbuilders constructs warships and submarines. These companies, which were traditionally state-owned, still dominate 85% of the sector, but Modi's reforms are opening the market to private firms like Adani Group, Larsen & Toubro, and Tata Sons. The government's goal is to raise annual domestic defence production from $20 billion to nearly $35 billion by 2030.


Asset managers, including Aditya Birla Sun Life, have introduced defence-focused funds to capitalize on this growth. Aditya Birla Sun Life’s CEO, A Balasubramanian, noted the large order books of major companies as a key attraction for investors. However, he highlighted that the sector is not fully open due to high government ownership in leading firms, with some retaining up to 80% state shareholding.


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The limited availability of shares in the market increases the risk of inflated valuations driven by small-scale investments. Hindustan Aeronautics, for instance, has a market capitalization of $31.9 billion, trading at nearly 10 times its book value and a price-to-earnings (P/E) ratio of 36. This means investors are paying 36 rupees for every rupee of current profits. Other companies, such as Bharat Electronics and Mazagon Dock Shipbuilders, are also trading at high P/E multiples, indicating heightened investor confidence despite the risk of overvaluation.


HDFC Asset Management was the first to launch a defence-focused fund in June 2023, offering annualized returns of nearly 73% since inception. Due to overwhelming interest, the fund was closed for fresh investments in July 2024 to manage risks associated with high market valuations and volatility. Following HDFC's success, other asset managers have introduced similar schemes tied to the sector index managed by the National Stock Exchange. Motilal Oswal, for example, markets its fund with the slogan, “India is investing in defence, are you?”


The Nifty India Defence Index has outperformed broader market benchmarks, delivering nearly 56% returns in 2024 compared to 10% for the Nifty 50. India is modernizing its ageing military equipment, with two-thirds of it categorized as vintage. For the fiscal year ending in March 2025, the government allocated $20 billion for military modernization, slightly more than the previous year's $19 billion. Of this, 75% is earmarked for domestic procurement.


The rapid rise in defence sector valuations has attracted significant attention from both retail and institutional investors. Eighteen months ago, the total market capitalization of the sector was minimal, but there has been a sharp increase in valuation and the number of funds tracking the sector. Retail investors are not just drawn by financial returns but also by a sense of patriotism, believing their investments contribute to strengthening India's defence capabilities.

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