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The Nifty India Defence Index jumped 5.6 per cent on Friday to cap a record 17.2 per cent weekly gain — its biggest since the gauge was launched in 2022. The index closed at a fresh peak of 8,309.2.
This rally follows media reports suggesting an additional ₹50,000 crore could be earmarked for defence under a supplementary budget this financial year. “The boost will take overall defence allocation past ₹7 trillion for 2025-26,” noted Siddhartha Khemka, head of research, wealth management, Motilal Oswal Financial Services.
In the Union Budget presented in February, total defence outlay for FY26 was raised 7.7 per cent to ₹4.91 trillion from ₹4.57 trillion in the FY25 revised estimate.
The figure includes both revenue expenditure – such as salaries & wages and operational costs – and capital allocation, which covers procurement of new equipment and other capital expenditure.
Revenue expenditure has typically dominated defence outlays, accounting for 65 per cent in FY25 and averaging 62.4 per cent since FY21. Over the past five years, India’s overall defence budget and defence capex have increased at a compound annual growth rate of 7.6 per cent.
Companies in the defence sector tend to benefit more from higher capital allocations. For FY26, capital allocation is budgeted to increase 12.9 per cent to ₹1.8 trillion from ₹1.6 trillion in the FY25 revised estimate. However, actual capex in FY25 rose just 3.4 per cent over FY24; it was 7.3 per cent below the Budget estimate.
In contrast, revenue expenditure is budgeted to rise 4.9 per cent to ₹3.12 trillion in FY26 from ₹2.97 trillion in the FY25 revised estimate. Actual revenue spending in FY25 was 2.3 per cent higher than in FY24 and 5.1 per cent above the Budget estimate.
Shares of Paras Defence and Space Technologies, Cochin Shipyard, Mazagon Dock Shipbuilders, and Garden Reach Shipbuilders & Engineers climbed between 10 per cent and 20 per cent during the week, fuelling the latest rally.
The Nifty Defence Index has now soared more than 50 per cent from last month’s lows. Investor interest has been rekindled amid heightened hostilities between India and Pakistan.
There is also optimism regarding India’s push for defence self-reliance, expanded budgets, growing exports, and progress in indigenous design.
“The successful performance of made-in-India defence systems against Chinese and other platforms in Pakistan is likely to boost long-term demand for India-made equipment,” said Ashwini Shami, executive vice-president and senior portfolio manager, OmniScience Capital. “This (the latest conflict) also showcased the modern style of remote warfare – without the involvement of too many personnel in direct engagement – and the sophistication of the Indian systems and their integration with disparate systems from various countries. This highlighted not only defence production but also India’s integration capabilities to make them work together.”
Still, analysts caution that current valuations may be reflecting excessive optimism. The index has nearly trebled over the past year, compared with an 11.2 per cent gain in the Nifty 50 over the same period.
The 17 stocks in the defence index are now trading at a trailing price-to-earnings (P/E) multiples of 51x – more than double the Nifty 50’s 23x. Such elevated valuations can pose a downside risk if market sentiment turns or companies fall short of earning expectations. High multiples also suggest much of the anticipated growth is already factored into current prices, limiting room for further upside.
