Nifty Defence Index Up 31% Since Pahalgam Attack; Should You Still Invest? What Experts Say

Last Updated:May 29, 2025, 15:06 IST

Sector/Thematic funds tend to have extremely concentrated exposures. This is particularly true for the Defence index, where the top 3 stocks account for over 50% of the index.

Stocks Of Defence Sector: Defence stocks have garnered significant interest among investors recently, following a cooling period after an exceptional performance in past 2-3 years. This renewed interest in buying comes amid geopolitical tensions after the Pahalgam terror attack on April 22 and the subsequent Operation Sindoor on May 7-8.

Since the Pahalgam terror attack, the Nifty India Defence index has jumped approximately 31%, indicating a positive outlook due to the rising demand for military equipment like missiles and tanks.

Bharat Electronics Limited (BEL) shares have risen by 28% during this period, reaching a record high of Rs 393.50 apiece. Meanwhile, Garden Reach Shipbuilders & Engineers (GRSE) shares have surged 53%, nearing 52-week high of Rs 3,039.90 apiece.

Although these stocks experienced a sharp correction in late 2024 after their significant run, they have recently bounced back, driven by positive sentiment around recent events, argued Kaustubh Belapurkar, Director-Manager Fund Research at Morningstar Investment Research India.

Between FY17 and FY24, the value of defence production in India almost doubled to Rs. 1.27 lakh crore, while exports grew nearly 15 times to Rs. 21 thousand crore.

Today, the index constituents hold a combined order book of more than Rs. 3.5 lakh crore, said Varun Gupta, CEO of Groww Asset Management Company. He noted that this is supported by improving financials, growing order books, and strong policy backing.

Policy measures such as Make in India, Defence Procurement Procedures, the Positive Indigenisation List, a focus on private sector participation, and advancements in modernization and technology are key drivers of growth and investment in the defence sector, Prasanna Pathak, Managing Partner, The Wealth Company Asset Management.

Will The Sizzle In Defence Stocks Continue?

Experts expect defence stocks to cool off and consolidate in the coming months as geopolitical tensions ease. They note that many of these stocks used to trade at 10-15 multiples but are now trading at 40-50 times PE multiples. Therefore, future returns will likely be driven by earnings growth since most PE multiple re-rating has already occurred.

Given the current geopolitical situation, it is widely expected that the defence sector will remain in the spotlight for at least the next 2-3 years, and the current multiples are likely to sustain, Pathak added.

The Indian government also prioritizes the defence budget, with allocations growing each year and more than doubling over the past decade. Recent geopolitical events have sharpened the government’s focus on national defence and reinforced its strategic importance, Gupta believed.

What Should Investors Do?

Experts view defence as a long-term structural story but caution retail investors to be careful.

Retail investors, Pathak said, should exercise caution when investing in sectoral funds as the portfolio is concentrated in a single sector or theme. These sectors experience up and down cycles.

Sector/Thematic funds tend to have extremely concentrated exposures. This is particularly true for the Defence index, where the top 3 stocks account for over 50% of the index and the top 5 holdings for over 70%. This concentration makes the returns of the funds/index very dependent on the price movement of only a few stocks. Investing in these funds carries timing risk, making entry and exit timing crucial.

Only investors who can take a fundamental view on the underlying stocks should invest in these funds. Most investors are better served by investing in diversified equity funds, suggested Belapurkar.

Gupta recommended SIPs as a prudent way of participating in this long-term growth story while navigating short-term volatility and elevated entry points.

Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Users are advised to check with certified experts before taking any investment decisions.

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