Defence stocks witnessed a sharp decline even as broader Indian equity markets gained momentum following the government’s decision to streamline Goods and Services Tax (GST) rates. The 56th GST Council scrapped the 12% and 28% slabs, consolidating them into just two—5% and 18%. While this reform buoyed overall market sentiment, it failed to lift defence counters. Shares of Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Mazagon Dock Shipbuilders, Garden Reach Shipbuilders, and Bharat Dynamics (BDL) fell between 1% and 4%.
The weakness in defence stocks is not confined to a single session. After months of aggressive buying, the Nifty India Defence index corrected nearly 5% in August, following a 12% fall in July. Among key stocks, Bharat Dynamics emerged as the worst performer with a 12% decline in a month, while Mishra Dhatu fell 10.5%. Even stalwarts like HAL and BEL shed around 4%. Analysts attribute the pullback to profit booking after a multi-year rally, coupled with concerns about fiscal constraints potentially slowing fresh defence capital expenditure.
Yet, India’s defence sector continues to demonstrate robust growth. The defence budget has expanded 2.6x over the last decade to Rs 6.81 lakh crore in FY26. Exports surged to a record Rs 23,622 crore in FY25 from Rs 686 crore in FY14, while production nearly doubled from Rs 79,071 crore in FY20 to Rs 1,50,590 crore in FY25. Defence PSUs contributed 77% of production, with private sector participation steadily rising to 23%.
Silver linings and growth drivers
Looking ahead, India’s defence production is expected to nearly triple from Rs 94,845 crore in FY22 to ~Rs 3 lakh crore by FY29, implying an 18% CAGR. Defence exports are projected to grow at a 20.6% CAGR, surpassing Rs 50,000 crore by FY29, positioning India as a credible global supplier of advanced defence systems.
Strong order books provide visibility for leading players. HAL’s current order book stands at Rs 1.89 lakh crore (~6.1x FY25 revenue), BEL at Rs 74,859 crore (~3.1x), BDL at Rs 22,700 crore (~6.8x), and Azad Engineering at Rs 6,000 crore (~13.1x). Private players are gaining momentum. Companies such as Data Patterns, DCX Systems, Astra Microwave, Centum, Apollo, and Azad delivered 27.9% YoY revenue growth in Q1FY26 versus 8.2% for DPSUs. EBITDA margins expanded 219 basis points to 17.5%, with PAT surging 50.9% YoY to ₹975 crore, highlighting scalability and efficient order execution.
Defence funds
Mutual funds with concentrated defence and PSU exposure mirrored the sector’s volatility. Over the past three months, defence-focused funds lost between 8% and 15%. The Groww Nifty India Defence ETF FoF fell 14.91%, while Aditya Birla Sun Life and Motilal Oswal’s defence index funds declined similarly. The actively managed HDFC Defence Fund was down 8.9%. PSU and real estate-focused funds also underperformed amid broader sectoral weakness.
Adding to caution, JM Financial downgraded infrastructure and defence to “underweight,” citing potential fiscal tightening. The brokerage warned that GST and income tax cuts may reduce government revenue, curbing capital expenditure. Banking and NBFCs also face slow credit growth and rising asset quality stress, further limiting investment inflows.
Investor takeaways
While fundamentals in India’s defence sector remain strong, short-term headwinds have weighed on valuations. Sectoral concentration risk is a key concern for investors, making these stocks and funds more suitable for long-term investors with high risk tolerance.
Several defence stocks continue to carry BUY ratings with attractive upside as of September 2025: HAL (Target ₹5,570), BEL (₹500), BDL (₹1,965), Azad Engineering (₹1,900), Data Patterns (₹3,100), and Zen Technologies (₹2,150), according to Choice Institutional Equities report.
Despite near-term volatility, the combination of robust budgets, rising exports, private sector growth, and strong order books reinforces the long-term growth story of India’s defence sector.
Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.