Will the bull run in defence stocks continue? Long-term growth seen, but valuations flash warning signs

Mint

03-06-2025

Defence stocks have been on a blistering rally, with the NSE Defence Index soaring 20 percent in the last one month, vastly outperforming the Nifty 50, which rose by only about 1 percent during the same period. With India sharpening its strategic focus on indigenous defence manufacturing amid global geopolitical tensions, many investors are wondering: Will the bull run in defence stocks continue? While the long-term fundamentals remain strong, market experts warn that valuations have already priced in much of the near-term earnings growth.
The bull case for defence stocks is rooted in a larger geopolitical and policy shift. According to Omniscience Capital, which manages a defence-focused smallcase, the Indian government is likely to ramp up defence spending from the current ~2 percent of GDP to 3–4 percent over the next decade. With India expected to become a $10 trillion economy by 2035, this would imply an annual defence budget exceeding USD 300 billion, or ₹ 30 lakh crore—translating to a 16–17 percent CAGR in defence expenditure over the next ten years.
Omniscience Capital's report, 'Operation Sindoor: An Inflection Point for Bharat's Omni Defence Strategy', argues that the recent military and security operations have highlighted the need for a robust, future-ready defence infrastructure—not just to protect borders, but also to secure India's digital ecosystems, trade routes, and overseas strategic assets.
India's domestic defence production crossed ₹ 1.4 lakh crore in FY25, with DPSUs (Defence Public Sector Undertakings) contributing around ₹ 1.1 lakh crore, or 78 percent. Of this, ₹ 90,000 crore came from 8 listed DPSUs, forming 66 percent of the total DPSU output. The government now aims to double the total defence production to ₹ 3 lakh crore by 2029. Even assuming DPSUs maintain a 60 percent share, their combined output would need to grow at 18 percent CAGR, hitting ₹ 1.8 lakh crore by 2029.
Analysts project that the turnover of listed DPSUs will grow by 18 percent in FY26 and 22 percent in FY27, while 9 unlisted DPSUs are estimated to generate over ₹ 20,000 crore in FY26 alone. Private players are also expected to play a larger role, diversifying the sector's investment potential.
However, while the sector's structural growth story remains intact, concerns around high valuations are surfacing. The median trailing P/E of listed DPSUs stands at 57, with forward P/E for FY26 and FY27 at 45 and 36, respectively. Valuations are even steeper for private defence companies, making investors vulnerable to corrections if expectations aren't met.
Dr. Vikas Gupta, CEO of Omniscience Capital, said, 'The future of India's defence sector is undoubtedly bright. However, we urge investors to remain valuation-conscious. Much of the high growth has already been factored into stock prices, particularly in the short term.'
Despite these cautionary signals, experts argue that the rally has legs over the long run. India's strategic ambitions—to become the world's third-largest economy by 2027–28 and a 7–8 percent contributor to global GDP—will require significant defence investment. The Indian Armed Forces are under pressure to modernize, especially with neighboring countries likely to boost their own defence spending in response to India's growing capabilities.
Moreover, a strong fiscal position and global interest in India as a defence exporter could help sustain capex in the sector, while also creating tailwinds for listed players.
Overall, the bull run in defence stocks has been driven by compelling macro themes: rising geopolitical risk, India's focus on self-reliance, and ambitious spending targets. However, with valuations running ahead of fundamentals in many cases, the question for investors is no longer whether defence is a growth story—it is how much of that growth is already in the price. Experts suggest a balanced approach: remain invested for the long-term transformation underway, but be selective and valuation-conscious in the short run. The next leg of the rally may belong not to the sector as a whole, but to the well-positioned companies with sustained earnings visibility.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.