Why are Defence Sector Stocks Appealing to Investors?

With one of the greatest armed forces in the world, India is strategically significant to the Indian government. The Indian defence sector has three primary market segments: military fixed wing, naval vessels and surface combatants, and missiles and missile defence systems.

For the past five years, India has been one of the biggest importers of defence equipment, gaining a technological edge over rival nations like China and Pakistan.

With the implementation of significant reforms to promote growth in this enormously potential industry, the value of defence production in the nation surpassed US$ 12 billion (₹1 lakh crore) for the first time. Compared to US$ 11.4 billion (₹94,845 crore) in FY22, the amount was US$ 13.1 billion (₹1,08,684 crore) in FY23. Defence output was valued at US$ 5.6 billion (₹46,175 crore) in FY24, whilst PSU defence production was valued at US$ 3.04 billion (₹25,271 crore).

Budgetary Support

The Interim Budget 2024–25 allotted US$2.9 billion (₹23,855 crore) to the Defence Research and Development Organisation (DRDO) and US$12.0 billion (₹1 lakh crore) for Deep Tech, which will provide long-term financing to tech-savvy enterprises to promote innovation in defence technologies within India.

The Centre recently promised to more than increase India’s yearly military exports to ₹50,000 crore by 2028–2029 in an effort to position the country as a defence powerhouse. The industry is expanding significantly due to increased defence spending and an emphasis on indigenisation, which is good news for businesses in this market. This market is gaining attention as an appealing investment opportunity since it is positioned for continued growth and profitable order flow prospects.

Index and Stocks Performance

Nifty India Defence Index aims to track the performance of a portfolio of stocks that broadly represent the Defence theme. In the past 5 years, the index has delivered a total return of 55.52% and 177.67% in the past year.

Let us now have a look at the performance of top defence stocks based on 5Y CAGR from the Nifty 500 universe:

Note: The stocks have been selected from the Nifty 500 universe and sorted based on 5Y-CAGR as of June 18, 2024.

The most visible impact of this explosive growth is the run-up in the prices of defence stocks as the sector recorded outpacing demand. The Nifty India Defence Index, which tracks defence activity-related companies, has continuously outperformed the 50-share blue-chip index since last year.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.