Why are Indian defence stocks skyrocketing and should you buy?

Indian defence stocks have been witnessing a significant increase in share prices as the government’s larger aim to bring down dependence on imports and boost exports translates into a rise in production. 

Friday witnessed the rally of several Indian defence stocks with the announcement that the country- the world’s largest defence importer- had registered its highest-ever growth in defence production in the financial year ending March 31, 2024. 

Value of defence production in India touched Rs 1.26 lakh crore in 2023-24, registering a 16.8% growth over last year, Indian defence minister Rajnath Singh announced. 

Higher budgetary allocation on defence

The ministry of defence has been receiving the highest allocation among the ministries. The defence budget stood at Rs 6.21 lakh crore in FY25- 13.04% of the total union budget.

The allocation to the sector in the current financial year is 4.72% higher over the allocation for FY24 and 18.35% higher than the allocation in FY23.

The rally 

Shares of Data Patterns (India) Ltd. jumped nearly 7%, while those of Cochin Shipyard rose over 5%. Stocks of MTAR Technologies Ltd. and Mishra Dhatu Nigam Ltd. rose over 4% on Friday after the announcement. 

In the last one year, share price of Cochin Shipyard has surged by 909% while the share price of Mazagaon Dock has risen 336% in a year with Bharat Dynamics shooting up by 207% and Bharat Electronics rising by 166%. 

Defence PSUs show the way; exports on the rise 

Of the total value of production (VoP) in 2023-24, about 79.2% has been contributed by defence public sector units (DPSUs) and other PSUs, and 20.8% by the private sector. 

Additionally, defence exports have been on a steady rise, contributing significantly to the overall growth in the indigenous defence production. Defence exports touched a record-high of Rs 21,083 crore in FY 2023-24, reflecting an increase of 32.5% over the last fiscal when the figure was Rs 15,920 crore.

Growth potential spurs rise of defence focused funds

A reflection of growing potential in the sector is the rise in launches of defence-focused funds. 

In 2023, the HDFC Asset Management Company launched the first of its kind defence fund in India called the HDFC Defence Fund. It has given an over 55% return in the first half of 2024, according to an analysis done by The Economic Times. 

Motilal Oswal Asset Management Company too recently launched the Motilal Oswal Nifty India Defence Index Fund, collecting Rs 1,676 crore during the New Fund Offer (NFO) period between June 13 and 27. It is an open-ended fund which is benchmarked against Nifty India Defence Index TRI which has outperformed Nifty50 four times in recent six calender years. 

The Nifty50 is a stock market index representing the weighted average of 50 of the largest publicly traded companies listed on the National Stock Exchange of India (NSE)

Future outlook and analysis

While analysts have been largely optimistic about the sector, questions are also being raised about whether the stocks have entered the overvalued territory.

Some analysts have advised accumulating some of the high-performing stocks like Cochin Shipyard on dips.