Why defence stocks are falling despite 18% capex hike
Indian defence stocks saw sharp swings on Budget day, initially coming under heavy selling pressure after no headline-grabbing announcements by Finance Minister Nirmala Sitharaman for the sector. Immediately after the Budget speech, defence stocks were among the worst hit. The Nifty India Defence index plunged 6% at its lows.
Paras Defence and Garden Reach Shipbuilders fell close to 10%, while Mazagon Dock Shipbuilders dropped around 8%. Bharat Electronics slid more than 7%, reflecting investor disappointment over the absence of fresh policy triggers or large project announcements.
However, as markets stabilised and investors dug deeper into the fine print, defence stocks recovered part of their losses, even as they continued to trade in the red. Hindustan Aeronautics was last down around 3%, Bharat Electronics slipped 1.5%, Bharat Dynamics remained the biggest laggard, down nearly 7%, while Mazagon Dock was lower by about 3%. Data Patterns and Zen Technologies were down around 1-3%.
Paras Defence remained under pressure with a 4% decline, while Garden Reach Shipbuilders managed to turn marginally positive. Astra Microwave Products was largely flat.
The recovery came as investors reassessed the sharp increase in defence capital expenditure. The capital outlay for FY27 stands at Rs 2.19 lakh crore, compared with the revised FY26 estimate of Rs 1.86 lakh crore, marking an increase of roughly 18%.
Why are defence stocks falling?
Jefferies had earlier expected defence capex growth of more than 25%, building on strong momentum in FY26. The current increase is a miss on that front. The brokerage pointed out that in FY26, around 62% of the Rs 1.8 lakh crore defence capex allocation was already spent between April and November 2025, significantly higher than the 41-54% utilisation seen during the same period in previous years. This was partly driven by emergency procurements following the India-Pakistan conflict under Operation Sindoor in May 2025.
The weakness was also in line with the broader market sell-off, triggered by higher securities transaction tax on futures and options and a sharp risk-off move during the special Sunday trading session.
There were also smaller supportive measures in the Budget. The finance minister announced exemptions on basic customs duty for components and raw materials used in the manufacture of civilian training aircraft and aircraft parts for maintenance, repair and overhaul activities in the defence sector. While modest, these steps were seen as incremental positives for the domestic defence manufacturing ecosystem.
Varun Gupta, CEO of Groww Mutual Fund, said the higher allocation highlights the government's focus on strategic preparedness and indigenous capability building. He noted that capital-led defence spending has a strong multiplier effect by supporting domestic manufacturing, technology development and skilled employment.
Overall, defence stocks continue to trade below pre-Budget levels, weighed down by broader market weakness. However, analysts say the sharp capex increase and continued policy push for indigenisation suggest that the sector's long-term fundamentals remain intact, even if near-term volatility persists.
"Higher allocation for the defence capex would be positive for all the defence companies like Bharat Electronics, Bharat Dynamics, and Hindustan Aeronautics, among DPSUs," Motilal Oswal said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
Paras Defence and Garden Reach Shipbuilders fell close to 10%, while Mazagon Dock Shipbuilders dropped around 8%. Bharat Electronics slid more than 7%, reflecting investor disappointment over the absence of fresh policy triggers or large project announcements.
However, as markets stabilised and investors dug deeper into the fine print, defence stocks recovered part of their losses, even as they continued to trade in the red. Hindustan Aeronautics was last down around 3%, Bharat Electronics slipped 1.5%, Bharat Dynamics remained the biggest laggard, down nearly 7%, while Mazagon Dock was lower by about 3%. Data Patterns and Zen Technologies were down around 1-3%.
Paras Defence remained under pressure with a 4% decline, while Garden Reach Shipbuilders managed to turn marginally positive. Astra Microwave Products was largely flat.
The recovery came as investors reassessed the sharp increase in defence capital expenditure. The capital outlay for FY27 stands at Rs 2.19 lakh crore, compared with the revised FY26 estimate of Rs 1.86 lakh crore, marking an increase of roughly 18%.
Why are defence stocks falling?
Jefferies had earlier expected defence capex growth of more than 25%, building on strong momentum in FY26. The current increase is a miss on that front. The brokerage pointed out that in FY26, around 62% of the Rs 1.8 lakh crore defence capex allocation was already spent between April and November 2025, significantly higher than the 41-54% utilisation seen during the same period in previous years. This was partly driven by emergency procurements following the India-Pakistan conflict under Operation Sindoor in May 2025.
The weakness was also in line with the broader market sell-off, triggered by higher securities transaction tax on futures and options and a sharp risk-off move during the special Sunday trading session.
There were also smaller supportive measures in the Budget. The finance minister announced exemptions on basic customs duty for components and raw materials used in the manufacture of civilian training aircraft and aircraft parts for maintenance, repair and overhaul activities in the defence sector. While modest, these steps were seen as incremental positives for the domestic defence manufacturing ecosystem.
Varun Gupta, CEO of Groww Mutual Fund, said the higher allocation highlights the government's focus on strategic preparedness and indigenous capability building. He noted that capital-led defence spending has a strong multiplier effect by supporting domestic manufacturing, technology development and skilled employment.
Overall, defence stocks continue to trade below pre-Budget levels, weighed down by broader market weakness. However, analysts say the sharp capex increase and continued policy push for indigenisation suggest that the sector's long-term fundamentals remain intact, even if near-term volatility persists.
"Higher allocation for the defence capex would be positive for all the defence companies like Bharat Electronics, Bharat Dynamics, and Hindustan Aeronautics, among DPSUs," Motilal Oswal said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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