Defence Stocks To Buy: Where should one place bets after a 40% rally this week

1 month ago

The Nifty India Defence Index surged over 13% this week, registering its best week since July 2024.

Barring Solar Industries, all of the 18 members of the index saw gains in double digits, with Dynamatic Technologies being the lowest at 12%, and Garden Reach Shipbuilders being the top gainer for the week, with a 38% advance.

In fact, Garden Reach Shipbuilders and Cochin Shipyard (up 37%), were the top gainers on the Nifty 500 index for the week.

Defence stocks have been on a tear since the commencement of Operation Sindoor to destroy terror bases in Pakistan on May 7. Major defence stocks have added ₹1.6 lakh crore in market capitalisation since May 7. The stocks have been on a tear after Prime Minister Narendra Modi praised India's defence companies and called for Defence equipment that is Made-in-India.

India's doubling down on indigenous defence manufacturing has seen a turn for the better as now, nearly 65% of all defence equipment is manufactured in the country, compared to a decade earlier, when nearly 70% to 75% of the Defence requirement was imported.

Jyoti Gupta of Nirmal Bang Institutional Equities Research believes that while the street may find current valuations of these defence companies to be stretched after this recent run-up, they would be justifiable once there is earnings growth visibility.

"As order execution accelerates and operating leverage kicks in, investor confidence in current valuation should strengthen, making them reasonable," Gupta told CNBC-TV18 on Friday, May 16.

Based on this, she highlighted Hindustan Aeronautics (HAL), Bharat Dynamics (BDL) and BEML as her top picks from within the defence space.

Gupta also highlighted that companies like Solar Industries and Data Patterns will also be beneficiaries of increased defence production as they are key suppliers to the big companies for electronic warfare and explosives.

However, not everybody is convinced. Kotak Institutional Equities put out a note on Cochin Shipyard on Friday with a sell rating and a price target of ₹850. That's a downside potential of 60% from current levels.

Kotak believes that the lack of orders from the Indian Navy is a cause of concern for Cochin Shipyard, and that any potential tie-up with Korean companies, Maersk, or Drydocks World could be the next positive trigger for the stock.

So, what’s next for defence companies?

Industry sources have told CNBC-TV18 that replenishment orders worth ₹30,000 crore to ₹40,000 crore are expected, and India's defence budget, which stood at ₹6.8 lakh crore for FY26, is set to increase next year.

(With Inputs From Parikshit Luthra and Reema Tendulkar.)

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