Defence outshines all sectors with 35% rally in 2025: What's driving the surge and will it last?

Economic Times

2 days ago

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India's defence sector has emerged as the strongest performer over the past six months, delivering a remarkable 34.82% return — far ahead of all other sectoral indices. While broader market benchmarks like the Nifty gained 5.49% during the same period, and sectors such as IT (-12.18%) and pharma (-6.43%) saw declines, defence has stood out as a clear winner.A large part of this rally has been driven by the strong performance of defence-focused public sector undertakings (PSUs) like Hindustan Aeronautics (HAL), Bharat Electronics (BEL), and Bharat Dynamics (BDL). These companies have reported healthy order books, consistent execution, and improved margins, supported by steady procurement from the Indian government.Analysts attribute this outperformance to increased investor confidence, driven by greater visibility into long-term orders, strong cash flows, and the ongoing re-rating of PSUs across sectors. With the Indian government prioritising indigenous defence manufacturing under initiatives like Make in India and Atmanirbhar Bharat, the outlook for domestic defence players remains positive.According to Sagar Shinde, VP of Research at Fisdom, 'PSU defence companies like HAL, BEL, and BDL have reported healthy order books, margin expansion, and earnings growth. Additionally, heightened geopolitical tensions have further increased interest in the sector, both domestically and globally.'The strong market performance in defence stocks has translated into impressive returns for mutual funds focused on the sector — particularly over the last three months. During this period, defence-based mutual fund schemes have delivered returns of up to 39%, with the category average standing at 36.98%.The Motilal Oswal Nifty India Defence ETF led the pack with a 38.58% gain, followed closely by Groww Nifty India Defence ETF FoF and Groww Nifty India Defence ETF, which returned 38.32% and 38.48%, respectively. The HDFC Defence Fund, the only actively managed scheme in the category, posted a return of 30.04%.The surge in returns reflects growing investor interest in the sector, aided by themes like self-reliance, modernisation, and defence exports . However, financial advisors have warned that sectoral funds can be volatile and are best suited for investors with a high-risk appetite and a long investment horizon.Hrishikesh Palve of Anand Rathi Wealth cautioned, 'These sectors often experience cyclical performance and require timely entry and exit to capitalize on momentum, which can be difficult for most investors to navigate. Chasing current momentum in such sectors is not advisable.'The sector has also gained from developments on the global front. A recent NATO announcement to raise defence spending significantly over the next decade has been viewed as a major export opportunity for Indian manufacturers. Indian defence firms, many of which are now part of global supply chains, are expected to benefit as countries diversify their defence procurement sources.India's target of reaching $5 billion in defence exports by 2025 has also improved long-term sentiment. Recent bilateral defence deals with countries in Africa, Southeast Asia, and the Middle East point to a growing international footprint.While the sector's rally is underpinned by strong fundamentals, analysts warn that valuations are stretched and the market may enter a phase of consolidation. 'The optimism around future order wins, export growth, and policy tailwinds may already be priced in,' said Palve. 'A phase of mean reversion would not be surprising.'As of mid-2025, the defence sector stands at the intersection of government policy, geopolitical developments, and investor optimism. Whether it can sustain this pace of growth will depend on continued execution and the ability to capitalise on both domestic and global opportunities.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)