Defence shares unlikely to rerate following Union Budget, correction poses stock-picking opportunity

Analysts concur that valuations in the space remain high, with some pockets trading at high multiples of nearly 40x.

• Defence budget raised to Rs 7.6 lakh crore, up 7% from revised estimate
• Defense stocks dropped 5-10% despite higher funds; re-rating depends on execution.
• Military modernization capex up 17.6% YoY; aircraft, electronics sectors benefit

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A broad-based re-rating in defence stocks is unlikely immediately after the Union Budget 2026, even as the government announced an increase in defence spending. Experts believe that any meaningful re-rating in the segment hinges on execution over the next few quarters.

However, defence stocks saw a sharp sell-off in the session following the Budget, with several frontline and mid-cap names correcting 5–10% in a single day, despite the increase in allocation. The total defence budget now stands at Rs 7.6 lakh crore up 7% from the revised estimate.

Capex outlay for military modernisation has been raised to Rs 2.19 lakh crore, marking a 17.6% YoY increase, and lifting capital spending to its highest share of total defence expenditure in over a decade.

“A [sectoral] re-rating is likely once execution improves. Orders are visible, approvals are in place, but investors may need to wait one to two quarters for execution to show up in earnings,” Mirae Asset Sharekhan’s Ankit Soni said.

PL Capital’s Amit Anwani concurred, adding that the near-term reaction looks sentiment-driven, not fundamental. “Going forward, the space should turn selective rather than broad-based. Structurally, the government’s focus on defence remains intact. Orders are visible, allocations are supportive, and execution will be the key driver. Stocks with valuation headroom and earnings visibility should stabilise first,” he said.

“The defence allocation has actually come in better than expectations,” he added. “On a revised estimate to budget estimate basis, the increase is around 17–18%, which is higher than what I was expecting. Some market participants were talking about a 25% increase, but that was always an optimistic assumption.”

Breaking down the allocations, Anwani pointed to strength in aircraft and aero engines, with FY27 allocation at around Rs 63,700 crore. “While this is lower than the sharply revised FY26 number, it is still much stronger than the original base, which is clearly positive for aircraft and aero-engine players like HAL,” he said.

He also flagged a sharp jump in the ‘Other Equipment’ category — which includes electronic warfare systems, radars, UAVs, missiles and air defence systems — with allocation rising to about Rs 82,000 crore in FY27 from a revised Rs 50,700 crore in FY26.

“This is the big surprise in the Budget,” Anwani said. “This category is clearly supportive for defence electronics and missile-related companies.”

On the biggest gainers from today’s announcement, analysts noted stocks like Bharat Electronics, BDL, and HAL could be winners, basis execution.

Varun Gupta, CEO of Groww Mutual Fund noted that the higher allocation to defence underscores the government’s twin priorities of strategic preparedness and domestic capability-building.

“Beyond immediate security needs, capital-led defence spending has a powerful economic multiplier —supporting indigenous manufacturing, technology development and skilled employment. A sustained shift towards domestically sourced defence capital can strengthen India’s strategic autonomy while creating durable growth opportunities across the broader industrial ecosystem,” he said.

Valuations remain high

Analysts concur that valuations in the space remain high, with some pockets trading at high multiples of nearly 40x. On valuations, Anwani noted that “defence electronics valuations could correct if the market factors in the budget, while HAL and shipbuilding valuations look reasonable given the allocations.”

From an investment perspective, Soni said the recent correction could create opportunities selectively. “If execution picks up at a faster pace, this could be a good time to buy. If execution remains slow, it may be better to wait and hold before reassessing positions, particularly in defence,” he said.