Defence theme still has firepower but it is no longer a blind bet, say experts

Finding Alpha at Moneycontrol’s Mutual Fund Summit 2025 – Bengaluru Edition

The defence rally, which has already delivered multibagger returns over the last few years, may still have ammunition left but fund managers warn that investors must now be more selective. Speaking at Moneycontrol’s Mutual Fund Summit 2025 – Bengaluru Edition, leading market voices said the defence sector’s structural tailwinds remain intact, though the easy gains may be behind us.

Deepak Shenoy, CEO of Capitalmind AMC, pointed out that while the defence theme has been one of the most successful in recent years, investors should brace for a more measured phase of growth.

“The early-stage euphoria is over. A lot of the value has already been discovered. But the long-term opportunity is still real, India’s manufacturing story is only just beginning,” he said. According to Shenoy, this phase of consolidation should not be mistaken for a slowdown. “The defence order pipeline is strong, capex is picking up, and domestic companies have proven they can execute large-scale projects. The numbers may look flat quarter to quarter, but that’s not the full picture. These are long-gestation businesses that will keep delivering as execution improves,” he added.

ALSO READ: After the midcap mania, market experts bet on largecaps for next round of alpha

Harsha Upadhyaya, CIO at Kotak Mahindra AMC, said the market has shifted from disbelief to conviction when it comes to defence manufacturing. “For years, investors dismissed defence as an opaque or government-dependent sector. Today, there’s clarity, visibility on orders, credible private players, and a government push that’s not cyclical but structural,” he said.

Upadhyaya noted that while valuations have rerated, the earnings catch-up has only just started. “We’re seeing better balance sheets, higher profitability, and order wins translating into revenue. These companies have real cash flows now, not just narratives,” he said.

Anish Tawakley, Co-CIO (Equity) at ICICI Prudential AMC, added a note of caution. “Defence has become a consensus trade, and whenever that happens, investors need to be careful,” he said.

“There’s no doubt about the opportunity, but not every defence stock will be a winner. Many smaller companies that are riding the theme don’t have sustainable business models or execution strength.”

The three fund managers agreed that the defence sector remains a cornerstone of India’s long-term industrial and export ambitions but investors should temper expectations and focus on fundamentals rather than headlines. “The theme still has legs,” Shenoy concluded. “But this is no longer about chasing momentum, it’s about holding companies that can deliver over a decade, not a quarter.”