Defence stocks fall after government reduces defence budget allocation in Union Budget 2024

Defence stocks may fall up to 20% after a strong rally recently, according to a note from brokerage firm Nirmal Bang.

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26 Aug, 2025 12:21

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Defence stocks fell on Tuesday after Finance Minister Nirmala Sitharaman did not announce any increase in the outlay for the sector in the Union Budget 2024.

Stocks such as HAL, Paras Defence and BEML fell by around 3 percent. At 2:15 pm, HAL was trading down 3 percent at Rs 4,847 and Paras Defence was trading at Rs 1,340, around 2.8 percent lower.

The FM announced Rs 4.54 lakh crore for the defence segment, reducing it from Rs 6.21 lakh crore announced in the Interim Budget.

"As far as the allocation to Ministry of Defence is concerned, I thank the Finance Minister for giving the highest allocation, which is 12.9  percent of total Budget of GoI for FY 2024-25. The capital outlay of Rs 1,72,000 Crore will further strengthen the capabilities of Armed Forces," said Defence Minister Rajnath Singh on social media platform X.

In the interim Budget, the Ministry of Defence (MoD) received the highest allocation among ministries, with 27.67 percent for capital expenditure, 14.82 percent for revenue expenditure, 30.68 percent for pay and allowances, 22.72 percent for pensions, and 4.11 percent for civil organizations under MoD.

In the interim budget announced in February, the defence budget for the current financial year was increased to Rs 6.21 lakh crore, within which around Rs 1.7 lakh crore was allocated towards capex. Analysts had expected the capex allocation to rise to Rs 1.9 lakh crore or even Rs 2 lakh crore in the Union Budget.

Currently, defence spending, as a percentage of GDP, is around 1.9 to 2 percent. But the industry has long advocated for increasing the capital expenditure to 3-4 percent, or even 5 percent, to accelerate modernization.

Krishna Appala, Senior Research Analyst at Capitalmind Research, had told Moneycontrol in a pre-Budget interaction that several public sector undertakings (PSUs) and private players in the industry are positioned for growth, driven by government initiatives.

Valuations a concern?

"Valuations in the defence sector are high, trading at 50-60x P/E FY25, but the market anticipates long-term growth, driven by government support for key sectors like this," he said, adding that the market factors in the continuity of government policies, with an expectation of schemes like the Production Linked Incentive (PLI) for domestic players.

Anil R, Senior Research Analyst at Geojit Financial Services, too spoke about the sector's stock valuations, which have historically been around 10-20 times earnings but have risen due to government policies, such as the import ban. This has significantly changed valuation multiples.

"Major defence companies have robust order books, but the execution remains a critical factor," he said.

"The industry's long-term outlook is positive, but near-term valuations are high. Companies like Cochin Shipyard, BEML, and Astra Microwave Products have strong order books, but there are concerns about execution timelines," Anil added.