Introduction

Indian retail investors are diving into defence stocks as Prime Minister Narendra Modi’s push for domestic arms manufacturing propels the sector to unprecedented heights. The Defence Index has surged nearly 56% over the past year, outperforming the broader market and attracting specialised funds launched by major asset managers.

Defence Stocks in High Demand

Modi’s vision of transforming India into a global manufacturing hub for defence has driven local companies like Hindustan Aeronautics and Bharat Dynamics to thrive. With defence production projected to grow by 20% annually until the end of the decade, investors are capitalising on the sector’s growth potential.

The government aims to boost domestic defence production from $20 billion to $35 billion annually by 2030. Companies like Mazagon Dock Shipbuilders are benefitting from swelling order books, producing fighter jets, missiles, and naval ships to meet growing demand.

The Role of Private and Public Players

While state-owned enterprises dominate 85% of the defence sector, Modi’s policies have invited private firms like Adani Group and Tata Sons to contribute. However, state ownership still heavily influences the market, with government shareholdings of up to 80% in key companies.

This limited free float means even small volumes of investor activity can sharply increase stock valuations. For instance, Hindustan Aeronautics now trades at nearly 10 times its book value, with a price-to-earnings multiple of 36.

Specialist Funds See Rapid Growth

Asset managers have responded with defence-focused funds. HDFC pioneered the trend in 2023, delivering an annualised return of 73% before closing the fund to fresh investments due to valuation risks. Other managers like Aditya Birla Sun Life and Motilal Oswal followed suit, drawing investors with high-growth prospects.

The Nifty India Defence Index has outpaced the broader Nifty 50 Index, which returned 10% during the same period. Such performance highlights the growing investor appetite for defence stocks, supported by government allocations of $20 billion for military modernisation in 2025.

Emotional and Strategic Appeal

Investors are motivated not only by financial returns but also by patriotic sentiments. Supporting domestic arms manufacturers is seen as a way to strengthen national security. A banker managing a defence fund noted that retail buyers often view their investments as a contribution to protecting India’s borders.

Potential Risks and Market Impact

While the growth trajectory appears promising, some experts warn of inflated valuations and market volatility. Limited investment opportunities within the sector create risks for those chasing short-term gains. Nevertheless, the long-term outlook remains positive, driven by India’s push to modernise its ageing military equipment and develop indigenous capabilities.

Conclusion

India’s defence sector is experiencing a transformative moment, combining financial opportunity with a sense of national pride. As retail investors and asset managers pour into this burgeoning market, the future of defence stocks looks bright. However, careful management of valuations and sustained government support will be crucial to maintaining growth and ensuring long-term stability.

Source: (FT.com)