The defence stocks continue to be in focus. The Nifty Defence Index has surged over 20% so far this year, but is there room for further upside? While most sector analysts agree that valuations are not exactly cheap, they suggest investors to ‘buy the dips’? As India’s defence exports hit record highs and global military spending continues to rise, we touch base with analysts for the right investment strategy now.
They outlined how drones, missile systems and electronic warfare are emerging as some of the biggest opportunities for Indian defence companies. While valuations have moved higher, analysts tracking the sector believe the long-term story is still evolving. This is majorly driven by rising global defence spending, increasing exports and a strong domestic order pipeline.
They outlined how the focus is gradually shifting beyond India’s own defence procurement, towards export opportunities, especially after recent geopolitical developments.
Is the India-UAE defence collaboration another trigger?
One of the biggest developments recently has been the growing defence cooperation between India and the UAE. According to analysts, discussions between the two countries had been underway for some time, but recent geopolitical developments have added urgency to these talks.
Speaking to Harshit Kapadia, Vice President (Consumer Durables, Electricals & Capital Goods) at Elara Securities, said the collaboration could improve global confidence in Indian-made defence equipment.
“It was expected after the war (US-Iran) that something is definitely going to come to India,” said Kapadia.
He believes India’s growing track record in defence manufacturing and exports could make overseas buyers more comfortable with Indian products.
“It will only add value to India’s manufacturing, and more products’ reliability will increase globally,” he noted.
According to Kapadia, the recent conflict has accelerated discussions that were already taking place rather than creating an entirely new opportunity.
Can defence exports become the next big growth engine?
Another question investors are asking is whether India’s defence export story is only beginning.
According to Kapadia, the answer is largely yes.
The government has already set an ambitious target of around $5 billion in defence exports, and he expects exports to keep rising over the coming years. Since many defence contracts are signed directly between governments, the timing of individual deals may vary, but the broader trend remains positive.
Looking beyond the next few quarters, Kapadia believes global defence spending has entered a structural growth phase. He added, “If I take a next five-year kind of a view, we are very positive given the current situation on ground. All the countries are only increasing their spend on defence.”
That, according to him, creates room for India to steadily increase its defence exports.
Motilal Oswal also shared a similar view in its latest sector report. According to the brokerage, with signs of easing tension in West Asia, attention is likely to shift towards replenishing ammunition, missiles and critical military inventories. It expects demand to increase for drones, anti-drone systems, electronic warfare solutions and air defence platforms, both in India and overseas.
The brokerage believes many of these orders could begin materialising during FY27. This is supported by healthy order books and a pipeline of large contracts.
Defence stocks: Valuations expensive?
The defence index has already posted strong gains this year, raising concerns over valuations.
Kapadia acknowledges that valuations are no longer inexpensive, particularly after the recent rally. He said, “PSUs are somewhere closer to 30 to 40 times, whereas private sector is somewhere closer to 40 to 50 times.”
However, he does not expect a sharp correction in valuations purely because of pricing, adding, “We do not think the valuations are going to correct given the momentum across the globe is very high.”
Instead, he believes any earnings-related correction could create opportunities for long-term investors.
Kapadia said, “If there is some correction…it could be a buying opportunity.”
What are the top defence sector stocks to watch
While analysts remain constructive on the sector, their preferred stock ideas vary across different segments.
Kapadia’s preferred names include Solar Industries India, Hindustan Aeronautics (HAL), Bharat Electronics (BEL) and Bharat Dynamics (BDL) among the larger companies. Within the smaller-cap space, he prefers Data Patterns (India), Zen Technologies and AXISCADES Technologies.
Meanwhile, Teena Virmani, Executive Director – Capital Goods and Defence Analyst at Motilal Oswal Financial Services continues to remain positive on the sector. She said, “We are positive on the overall defense sector and our top pick is Bharat Electronics.”
According to her, Bharat Electronics is currently trading at around 37 times two-year forward earnings.
Teena Virmani noted, “We expect the focus on defense spending to continue on both domestic and international markets and certain large platform orders will also get finalised soon from domestic markets.”
Motilal Oswal’s latest sector report also continues to maintain Bharat Electronics as its top defence pick, while highlighting that healthy order books and stronger execution are expected to support sector growth during FY27 and FY28. The brokerage also expects increasing opportunities across drones, electronic warfare, missile systems and air defence technologies as both domestic and international demand continues to evolve.
What investors need to watch next
For investors, analysts suggest the focus may now shift from whether defence spending will rise to which companies are best positioned to convert that spending into long-term order inflows and execution.
Disclaimer: The article discusses sectoral analysis, expert commentary, and specific stock ideas for educational and informational purposes only. It does not constitute a direct offer or solicitation to buy or sell securities, and defence sector valuations remain subject to structural geopolitical factors, budgetary allocations, and contract execution timelines. Readers are advised to consult a SEBI-registered investment advisor or qualified financial professional before making any investment decisions. This disclaimer has been generated using AI to support user well-being and responsible content consumption.