Defence stocks extended gains despite an overall muted market sentiment on June 4, rising sharply to take the Nifty India Defence index higher by over a percent, extending gains for a third session in a row.
Shares of defence equipment makers have seen a significant rally in recent days, as geopolitical tensions have increased their orderbook visibility, with the combined market capitalization of the defence index rising by Rs 9,000 crore in this week alone. The index has ended in the green in 10 out of the past 11 sessions, and the m-cap of the index has jumped by Rs 48,700 crore since May 21.
Shares of Garden Reach Shipbuilders & Engineers (GRSE) were the top gainer on the index, jumping over 7 percent on June 4 to hit a record high after the firm signed a memorandum of understanding (MoU) with Norway’s Kongsberg for the construction of India’s first-ever polar research vessel (PRV).
Its peer shipyard company - Cochin Shipyard - saw its shares rise nearly 5 percent. Zen Technologies and Paras Defence followed suit to rise over 2 percent each. Mishra Dhatu Nigam (Midhani) shares rose around 1.8 percent, BEML and Mazagon Dock Shipbuilders shares rose over 1.4 percent each, while DCX India was up nearly 1.3 percent. Bharat Dynamics (BDL) and Astra Microwave Products shares were trading in the green with marginal gains.
Bucking the trend, Bharat Electronics (BEL), Data Patterns and few other defence stocks were in the red with marginal losses. Hindustan Aeronautics (HAL) shares were down over a percent on worries over delays in supplies of General Electric's GE-F404 engines for Tejas MK2, in light of US President Trump’s ‘America First’ stance.
"While valuations in the sector have expanded, they are underpinned by improving financials, growing order books, and deep policy support. Long-term structural reforms like the Defence Acquisition Procedure 2020, Positive Indigenisation Lists, and the creation of Defence Industrial Corridors in Uttar Pradesh and Tamil Nadu are building a holistic domestic defence manufacturing ecosystem within the country. On the budgetary front, historically, India’s defence budget has remained a high priority—election year or not—with allocations growing every year and more than doubling in the past decade. Recent geopolitical events have further sharpened govt's focus on national defence and reinforced its strategic importance,” said Varun Gupta, CEO, Groww Asset Management Company.
"We look at defence as a long-term structural story and suggest SIPs as a prudent way of participating in this long-term growth story while navigating short-term volatility and elevated entry points," he added.
According to Smallcase Manager Omniscience Capital, India will gradually increase its defence budget as a percentage of GDP from the current 2 percent to 3 percent, or even 4 percent over the next decade.
"Given the demonstration of advanced capabilities to not only attack but also defend, the Indian Armed Forces need to spend much more now to counter the potential competitive spending by neighbouring countries to match India’s capabilities. Only a much higher spending from India’s side would keep the advantage in future. This is why it is likely that future defence spends would be much higher than earlier declared plans of GoI and Indian Armed Forces post Operation Sindoor," said Vikas Gupta, smallcase Manager and CEO, Omniscience Capital.
Siddhartha Khemka, Head of Research, Wealth Management at Motilal Oswal Financial Services, meanwhile said, "Defence stocks also witnessed renewed interest amid heightened geopolitical tensions, particularly due to the escalating Russia-Ukraine conflict."
The rally in defence shares has seen a sharp surge after armed forces conducted targetted strikes on terrorist camps inside Pakistan and Pakistan-Occupied-Kashmir (PoK) under codename ‘Operation Sindoor’. As tensions escalated between both countries, defence stocks soared on hopes of stronger orderbook.
The war between Russia and Ukraine too has seen severe escalation recently, after a brief period of calm over hopes of a possible deal. Russia on May 31 launched 472 drones and seven missiles at Ukraine, marking the largest drone assault since the war's inception. Ukraine's air defenses allegedly intercepted 385 drones. Ukraine retaliated by conducting major strikes on Russia's military airbases on June 1, just a day before the countries were scheduled to hold peace talks in Istanbul. According to Ukrainian officials, the surprise drone attack destroyed over 40 warplanes at air bases deep inside Russia.
Additionally, UN nuclear watchdog recently alleged that Iran has stepped up its production of enriched uranium, a key component of making nuclear weapons. An International Atomic Energy Agency (IAEA) report has revealed that Iran possesses over 400 kg of uranium enriched to 60% purity, nearing the 90% threshold for weapons-grade material, according to a BBC news report. This has increased tensions between Iran and US, and President Trump has sent a proposal to Iran for a nuclear deal after multiple rounds of talks.
The heightened geopolitical climate is likely to have boosted the defence stocks on hopes of an increased spend on defence procurement and militarisation.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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