Over the past five years, the Nifty India Defence Index, which comprises stocks of defence firms, skyrocketed by 770 per cent. In comparison, the Nifty 50 was up 118 per cent, and Nifty 500 a higher 142 per cent. Over the past three years, the respective jumps were more than 300 per cent, 4 2 per cent and 53 per cent. Even in the past 12 months, the Nifty Defence Index beat the market indices, although its rise was more minimal and subdued.
But the situation reversed in the past three months. While the broad indices witnessed minor growth, the defence index dropped by nine per cent. A similar trend was witnessed in the past one month. In July, for example, Mazagon Dock, Cochin Shipyard and others slumped up to 18% within a month, which dragged the defence index down amidst worries over stretched valuations, delivery delays and execution risks. Mutual funds sold Rs 1,700 crore worth of shares in nine defence companies in the same month.
The irony is that the fortunes of defence stocks reversed dramatically a few weeks after Operation Sindoor, the virtual-drone war between India and Pakistan. The index rose during the year. In February 2025, it hovered just above 5,000, and rose to over 7,000 the day the war began. Over the next four weeks, it crossed 9,000. Then came the turnaround. Defence ETFs reflected this volatility. After the initial rally in May, sentiments turned cautious.
This pullback aligns with logical corrections after overheated rallies, as there is a reversal in rational and irrational exuberance. As the war threat receeded, and Operation Sindoor turned out to be more of a skirmish for a few days, rather than a full-fledged war, the euphoria cooled down. Profit-taking by the investors ensued amidst a more normalised environment.
While the long-term fundamentals like increased defence spending and indigenisation remain compelling, there is near-term caution. Investors now prefer selective, valuations-aware strategies. “Selective defence stocks gained on August 20, after the Government cleared Air Force's plan to acquire 97 LCA Tejas Mark-1A fighter jets for Rs 62,000 crore,” says Siddhartha Khemka, Head of Research (Wealth Management), Motilal Oswal Financial Services.
The beneficiary is the state-owned Hindustan Aeronautics, which stated in a filing, “We would like to inform that… Cabinet Committee of Security on August 19, 2025 has approved the proposal for procurement of 97 Light Combat Aircraft Mk-1A along with associated equipment… from the Company.” The company’s Q1FY26 EBITDA of Rs 12.82 billion grew 29 per cent YoY on account of revenue increase of 11 per cent, and expansion in margin due to lower provisioning.
According to ICICI Securities, the company can generate healthy returns in the medium term as the stock is currently trading at reasonable valuation post the recent corrections. “We reinitiate coverage with BUY and target price of Rs 5,800 (current price: Rs 4,433),” states its report (August 13).
Similarly, shares of Mazagon Dock climbed 3.6 per cent to an intraday high of Rs 2,798 on the BSE on August 25. The rally came after the Government cleared the way for negotiations on the Rs 70,000 crore Project 75 India, which involves building six new submarines. Hence, specific stocks, with specific linked good news, grabbed the attention of the buyers. Other defence stocks slacked.
According to AngelOne, “While India’s defence sector offers compelling long-term prospects, it also comes with complexities. Investors should evaluate each company’s readiness for the future, its financial strength and exposure to risk.” The report mentions three pluses such as strong Government support including Rs 6 lakh crore investment push, tech-led growth due to innovations, and global partnerships that will boost expertise and competitiveness.
The negatives include geopolitical uncertainty; the sudden stoppage of the short battle between India and Pakistan raised hopes, and scuttled the prices within weeks. Shifts in Government policies can upset the defence applecart. There is regulatory complexity, and strict compliances can slow down executions or delay projects. In addition, most defence firms rely heavily on Government orders.
On August 13, the BSE Index Services, a wholly-owned subsidiary of BSE, announced the launch of its defence index, BSE India Defence. Like its Nifty counterpart, it aims to track the performance of stocks that represent the defence theme. “The sector is undergoing a transformative phase, driven by policy reforms, increased budgetary allocations, and a rising emphasis on indigenous manufacturing,” says Ashutosh Singh, MD and CEO, BSE Index Services.
The Mumbai-based author writes on stocks and personal finance, and has an experience of 15 years