After a period of cooling off, India’s defence sector has roared back to life. On May 16, 2025, the Nifty India Defence Index surged to a record 8,309, registering a blistering 15% gain in just one week and surpassing its previous July 2024 peak. Leading the charge were shipbuilders and missile manufacturers—Garden Reach Shipbuilders (+37%), Cochin Shipyard (+35%), Paras Defence (+28%), Mazagon Dock (+19%), and Bharat Dynamics (+18%). But what’s fuelling this sudden spike? And more importantly, is it built to last?

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The Spark: Operation Sindoor and Rising Global Interest

The rally found its catalyst in Operation Sindoor, a demonstration of India’s indigenous defence prowess that has turned global attention to its military-industrial capabilities. A key outcome? Several countries are now in talks to procure the BrahMos missile system, while Russia is exploring the possibility of manufacturing its S-500 missile defence system in India.

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Exports: A Silent Revolution

India’s defence exports touched an all-time high of ₹23,622 crore in FY25, almost triple the levels in FY21. This growth has been largely driven by public sector undertakings (PSUs), whose exports surged 43% to ₹8,389 crore. The private sector, though flat, still commands a 64.5% share at ₹15,233 crore. India is also setting its sights beyond traditional partners—targeting Southeast Asia, Europe, and Africa, and positioning itself to tap into NATO’s planned €800 billion defence spend over the next 3-4 years.

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Global Tailwinds: Rising Military Budgets

According to Nuvama, global defence spending is forecast to reach $3.2 trillion by 2028, up from $2.4 trillion in 2023—a 5% CAGR. For Indian exporters, this global demand provides a massive runway. Domestically, the FY26 defence budget may see a ₹50,000 crore boost, potentially raising the total allocation to ₹7.3 lakh crore. This could supercharge indigenous R&D and procurement.

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But Here’s the Catch: Valuations Are Frothy Again

A key concern now is valuation stretch. In the past, the defence rally (June 2023–July 2024) was supported by strong earnings visibility and low P/Es. That’s no longer the case:

Company	P/E (July 2024)	Current P/E	3-Year Median
Mazagon Dock	58	52	31
GRSE	87	54	34
Cochin Shipyard	92	64	39
Bharat Dynamics	117	119	62
BEL	61	53	32

Valuations now bake in significant optimism. For instance, BEL trades at a P/E of 53, meaning investors are paying ₹53 for every ₹1 of profit—a premium that demands exceptional growth to justify.

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Mixed Earnings and Slowing Momentum

While Mazagon and BEL posted solid profit growth in FY25 (64% and 46%, respectively), Cochin Shipyard grew profits by only 3.6%, and Bharat Dynamics saw a 15% decline. Limited free float—such as the 84.8% government holding in Mazagon Dock—also skews price movements. Another red flag? Order inflows are slowing. Despite healthy order book-to-revenue ratios, fresh order momentum has dropped over the past year, partly due to election-related disruptions.

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Order Books: Stable but Not Expanding Fast Enough

Company	Order Book (Cr)	Revenue (Cr)	Ratio
Mazagon Dock	34,787	11,361	3.1
GRSE	23,877	5,076	4.7
Cochin Shipyard	21,784	4,528	4.8
Bharat Dynamics	22,800	2,422	9.4
BEL	71,700	23,183	3.1

However, many of these companies—BEL, GRSE, Mazagon, Cochin—have seen their order books shrink since Q1FY25. And the FY26 defence modernization budget only increased 4.6%, indicating limited scope for new contracts in the near term.

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Stock Prices vs Fundamentals: A Divergence

Some defence stocks have delivered stunning returns—Mazagon (192% CAGR), Cochin (135%), and GRSE (105%) over three years. Yet, their earnings CAGR lags behind, revealing a growing mismatch between price and performance.

Company	Revenue CAGR	Profit CAGR	Stock CAGR
Mazagon Dock	33%	47%	192%
GRSE	42%	43%	105%
Cochin Shipyard	12%	13%	135%
Bharat Dynamics	7%	33%	72%
BEL	13%	24%	69%

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What Lies Ahead?

The future hinges on execution and new orders. BEL is targeting ₹40,000 crore in FY26, while Bharat Dynamics eyes ₹32,000 crore. Shipbuilders may benefit more—Mazagon’s order book could rise to ₹1.3 trillion by FY27, and GRSE to ₹1.2 trillion, according to Antique. Yet, delays in execution, stretched valuations, and a high base effect from FY25 pose near-term challenges.

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Conclusion: Cautious Optimism Warranted

India’s defence story is far from over. Global tailwinds, rising exports, and a push for indigenisation point to a promising runway. But for investors, the path ahead demands careful navigation. Valuations are rich, order momentum is tepid, and execution risks are rising. The rally may continue—but only if order inflows pick up pace and companies deliver on earnings. Until then, it’s a battlefield where only the fundamentally strong will survive.