As during any crossborder conflict, the escalating tensions between the nuclear-armed neighbours are expected to boost earnings for domestic defence companies. A strong and resilient export outlook further strengthens the sector’s prospects, said experts.
Since the terror attack on tourists in Kashmir’s Pahalgam area on 22 April, the Nifty Defence index has increased 2.99%, significantly outperforming the Nifty 50, which has gained 1.2% over the same period.
Following India’s attacks on Wednesday, codenamed ‘Operation Sindoor’, the Nifty 50 and Sensex held strong despite early jitters, ending the day’s trading session in the green.
Among domestic defence-related companies, Hindustan Aeronautics Ltd has gained 3.88% over the past fortnight, Bharat Dynamics Ltd has gained 1.85%, and Mazagon Dock Shipbuilders Ltd, 2.33%.
Vikas Gupta, chief executive officer and chief investment strategist at OmniScience Capital, said the prospect of retaliatory action by Indian armed forces following the Pahalgam terror attack had intensified focus on the defence sector, with the defence ministry prioritising faster execution of projects.
While the order books of defence companies are large, spanning five-seven years, execution lagged, he said. “Now, there is pressure to execute orders quicker, possibly within three years instead of five. This could accelerate revenue and earnings… If that happens, analysts could upgrade their projections for defence companies,” said Gupta.
A key growth trigger for India’s defense sector was US President Donald Trump calling on Nato members to spend 5% of their GDP on defence. While India is not a member of the North Atlantic Treaty Organization, “less-developed countries are turning to affordable Indian weapons systems, boosting the prospects for India’s export”, Gupta added.
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India’s opportunity
Export opportunities for Indian defence manufacturers are significant as the global defence stockpile is at a 10-year low, said Vinit Bolinjkar, head of research at Ventura Securities, adding that only a few countries were shipping defence products.
“Russia is restricted in its export capabilities because any country buying from it risks sanctions from the US. Similarly, Israel, which is constantly engaged in conflict, has depleted its stockpile and cannot afford to export,” Bolinjkar said.
France is known more for its specialized, high-end defense equipment such as submarines and fighter jets, and not for conventional or cost-effective arms.
In this scenario, India is well-positioned to fill the gap, especially in the segment of affordable, conventional defence equipment, Bolinjkar said.
Investing in defence
Within India’s defence sector, sub-sectors such as aerospace and shipbuilding show significant potential, said experts.
Anirudh Garg, partner and fund manager at Invasset PMS, said the collaboration between Tata Advanced Systems Ltd and Airbus SE for the first military aircraft to be built in India highlighted the long-term growth prospects of the domestic defence sector.
“The private defence sector is another area gaining momentum, with companies such as Adani Defence & Aerospace making headway in UAVs (unmanned aerial vehicles), missiles, and ammunition,” Garg said.
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Gupta of OmniScience Capital recommended that instead of betting on pure-play arms and ammunition companies, investors should look at companies that have an indirect exposure to the defence sector, such as those involved in critical minerals, cybersecurity, and drones.
NMDC Ltd, Coal India Ltd, and Gujarat Mineral Development Corporation Ltd operate in the critical minerals segment.
“During a war, the priority often shifts from acquiring new platforms or systems to maximizing the operational capacity of the existing ones. For example, instead of placing new orders for an aircraft, the focus would be on ensuring that the existing aircraft are already in service are fully operational,” said Yellapu Santosh, research analyst at Anand Rathi Institutional Equities.
This leads to increased demand for maintenance, repairs, and upgrades, rather than new purchases.
Also, if the India-Pakistan conflict escalates into a full-blown war, companies involved in producing consumables, such as Solar Industries India Ltd and Bharat Dynamics Ltd, are likely to see more opportunities as demand for consumables increase, Santosh said.
