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The recent surge in defence stocks like Bharat Dynamics (BDL), Bharat Electronics (BEL), and Ideaforge Technology, fueled by the aftermath of Operation Sindoor, has sparked considerable interest among investors. This military operation, launched by India in response to a terror attack, has not only highlighted the capabilities of indigenous defence equipment but also raised expectations of sustained demand for these stocks. While the rally has undeniably pushed valuations higher, analysts suggest that select defence companies still present attractive opportunities for long-term investment. Operation Sindoor, initiated on May 7th, targeted terror camps across the border in response to the Pahalgam terror attack, underscoring India's commitment to national security and its reliance on domestically produced defence technology. The conflict showcased the effectiveness and efficiency of Indian defence systems, drawing global attention to their performance and quality. This increased visibility could translate into a surge in international orders in the coming years, further boosting the growth prospects of Indian defence companies. The stocks of several defence-related companies have experienced substantial gains since May 8th, ranging from 5 to 40 percent. This surge reflects investor confidence in the sector's future prospects, driven by factors such as the successful demonstration of indigenous equipment, robust government support for domestic defence manufacturing, and stronger-than-expected Q4 earnings. Companies like Ideaforge Technology, Mishra Dhatu Nigam, Zen Technology, Data Pattern, BDL, BEL, Bharat Forge, BEML, and Hindustan Aeronautics (HAL) have all seen their share prices increase by more than 10 percent during this period. Experts like Ajit Mishra, SVP of research at Religare Broking, attribute this rally to the heightened global awareness of India's defence prowess following the tensions with Pakistan. He points out that the success of indigenous equipment, coupled with the government's push for domestic defence manufacturing, has created a favorable environment for these stocks. Similarly, Prashanth Tapse, Senior VP of research at Mehta Equities, highlights the positive impact of the India-Pakistan conflict on the global perception of India's defence sector. The showcasing of India's defence capabilities and the efficiency of its products have led to increased interest in global business export opportunities. Additionally, the strong Q4 earnings reported by many defence companies have further fueled the rally, making these stocks even more attractive to investors.
However, the question remains: are defence stocks a sustainable long-term investment? While some analysts acknowledge that valuations are currently stretched, they maintain that the sector holds considerable potential for long-term growth. The primary driver of this optimism is the expectation that India's defence budget will continue to increase in the coming years due to ongoing geopolitical uncertainties and security challenges. Ajit Mishra emphasizes that the sector remains a compelling long-term investment opportunity despite the recent rally. He anticipates that geopolitical tensions will drive India’s defence budget, currently at 1.9 percent of GDP, even higher, providing further momentum to the sector. While stocks are trading slightly above fair valuation, experts suggest that continued earnings growth, similar to what was observed in Q4FY25, could justify the current valuations. Prashanth Tapse notes the wide range in price-to-earnings ratios among defence stocks, ranging from 40 to 120, indicating varying degrees of expensiveness. He advises investors to exercise caution and wait for potential price corrections, suggesting that profit-booking may occur at higher levels. Despite the high valuations, Tapse believes they are justified by the massive visibility in future earnings, the strategic importance of the sector, strong balance sheets with negligible debt, and high order book momentum. He views the defence sector's long-term prospects as structurally positive and anticipates a multi-year growth story spanning four to five years. The recent demonstration of India's defence capabilities has boosted investor confidence, and the increased global attention could translate into significant export potential. Tapse projects a CAGR of 12–15 percent for the Indian defence sector over the next five years, driven by initiatives like Make in India, export promotion, increased domestic procurement following the India-Pakistan tension, and higher capital expenditure in the annual defence budget.
While the overall outlook for defence stocks appears promising, experts caution investors to remain selective and mindful of potential near-term volatility. They emphasize the importance of focusing on fundamentally strong companies to ensure sustained long-term growth. Prashanth Tapse expresses a positive outlook on HAL, highlighting its relatively lower price-to-earnings ratio of around 40 compared to other defence stocks. He points out that HAL's order book has significantly increased from ₹94,129 crore at the beginning of the fiscal year to approximately ₹1.84 lakh crore, with expectations of reaching ₹2.5 lakh crore by the end of FY26. Tapse believes that HAL plays a pivotal role in India's defence sector, aligning with the nation's push for self-reliance in defence manufacturing. He views HAL as a promising long-term investment due to its multi-year revenue visibility, making it a proxy stock for the defence sector and a core compounder candidate. Kunal Kamble, Senior Technical Research Analyst at Bonanza, is bullish on Unimech Aerospace, citing a breakout from a triple-bottom pattern that indicates a potential trend reversal to the upside. He notes that the breakout is supported by rising volumes on buying days, reflecting strong buying interest. The stock is trading above its major EMAs, confirming bullish momentum. Additionally, DI+ is above DI-, and the ADX is above DI-, suggesting both an uptrend and strength behind the move. Kamble suggests that as long as the stock sustains above ₹990, it is expected to move towards ₹1,330, with a further upside potential to ₹1,450 in the short to medium term. Kamble also recommends buying BEML stock, noting that it has broken out from an ascending triangle pattern on the daily chart with strong volume support, indicating bullish momentum. On the weekly chart, BEML has also broken out of a seven-week consolidation, reflecting sustained buying interest. The RSI is moving higher, supporting the price action, while the stock trades above all major EMAs, confirming a strong uptrend. Kamble suggests that as long as BEML holds above ₹3,150, the structure remains positive, and the stock appears poised to move towards ₹4,550, with a further upside potential to ₹5,000 in the near to medium term. Investors should carefully consider these expert opinions and conduct their own due diligence before making any investment decisions in the defence sector.