Defence Stocks Decline Amid Tariff Tensions; Analysts Recommend Buys

Defence stocks in India have experienced a significant downturn, largely influenced by market reactions to recent tariff announcements by US President Donald Trump. The Nifty India Defence index declined nearly 5% in August following a 12% fall in July. Investors are reacting to a market correction after months of strong buying, with some defence stocks dropping as much as 12% in a month. Notably, Bharat Dynamics has emerged as the worst performer among index constituents, while Mishra Dhatu saw a decline exceeding 10.5%. Heavyweights like Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) recorded declines of around 4%.

Market Impact and Future Outlook

This downturn follows a remarkable four-month rally in defence stocks, as investors began to book profits. The mood in the Indian stock market has also been dampened by the announcement of a 50% tariff on certain imports by the United States, impacting various sectors, including defence. Despite this, analysts suggest that geopolitical tensions and a potential ten-year framework for the India-US Major Defence Partnership could reignite interest in the sector.

According to Vaqarjaved Khan, a Senior Fundamental Analyst at Angel One, the prospective India-US Defence Partnership may allow Indian companies to transition from component suppliers to full system integrators. He noted, “This leads to a strategic pivot away from Russian dependence towards US, European, and indigenous vendors, creating multiyear growth visibility for Indian defence manufacturers.”

The medium-term outlook remains optimistic, especially given sustained Indo-Pacific focus and the potential for collaboration in areas like co-production and technology transfer. Om Ghawalkar, a Market Analyst at Share.Market, emphasized the importance of monitoring how policy signals translate into tangible program milestones and budgeted procurement timelines.

Investment Recommendations

Analysts predict that revenue for defence Public Sector Undertakings (PSUs) could grow between 12% and 15% CAGR from fiscal year 2025 to 2027, while private sector players may achieve growth rates between 18% and 20% during the same period. This growth is anticipated to be supported by higher operating leverage and increasing export opportunities. The Ministry of Defence (MoD) has already placed contracts worth over ₹2.1 lakh crore in FY25, doubling year-on-year, which reinforces the analysts’ confidence in the defence sector.

In their recent Q1 FY26 defence review, PL Capital highlighted that both HAL and BEL exceeded profitability expectations, with HAL reporting a 27% and BEL a 28% profitability margin. Other companies like Solar Industries recorded strong defence-led growth at 25%. Shipbuilders such as Mazagon Dock and Cochin Shipyard also reported solid revenue growth, benefiting from robust order books for submarine and frigate programs.

As for which defence stocks to consider, analysts at PL Capital anticipate that FY26 will be another strong year for defence companies, driven by large project awards estimated between ₹1.5 trillion and ₹2 trillion over the next 18 to 24 months. Ghawalkar noted that record indigenous output and rising exports, combined with increased budget allocations, support a structurally strong near-term outlook.

Recommended stocks include HAL and BEL. Khan specifically stated that HAL possesses robust execution visibility with an order book exceeding ₹95,000 crore, which is approximately 3.5 times its expected FY25 revenue. He described BEL as a strong contender with an order book over ₹75,000 crore, particularly in radars and missile systems, and projected revenue growth of 16% to 17% for the next two years.

Khan concluded that companies with proven execution and strong institutional connections, such as HAL, BEL, and Data Patterns, are best positioned to lead the next wave of defence modernization, supported by resilient margins and substantial order books.

Investors are advised to consult with certified experts before making any financial decisions, as market conditions can change rapidly. This article serves an educational purpose and reflects the views of individual analysts, not necessarily those of the publication.