India’s defence sector has emerged as one of the stock market’s strongest performers in 2026.
India’s defence sector has emerged as one of the stock market’s strongest performers in 2026. Even as the broader market has struggled, defence stocks have attracted investor interest. The Nifty Defence Index has gained over 21.9% so far this year, significantly outperforming the Nifty 50, which has fallen over 8%. This makes defence the best-performing segment among the 11 Nifty sectoral indices, based on 27 July 2026 closing values.
Are defence stocks simply benefiting from a market theme, or is the rally supported by lasting structural changes in the industry? Most analysts believe the sector is in a multi-year growth cycle supported by government spending, accelerating indigenisation, rising procurement activity, and a growing export opportunity.
Brokerage houses remain constructive on the sector. Recent reports by Kotak Securities, Nuvama and 360 One Capital point to a strong growth runway driven by rising defence budgets.
One of the key indicators supporting the investment case is the sharp rise in Acceptance of Necessity (AoN) approvals. AoN is the government’s go-ahead for the armed forces to acquire equipment; it’s the first formal step in India’s defence procurement process. Kotak Securities notes that AoN approvals increased tenfold between FY2020-21 and FY2025-26. The brokerage believes heightened geopolitical tensions, ongoing military modernisation and expanding export opportunities will support order inflows for many years.
Nuvama argues that the industry is now moving into its next phase of development. The initial focus was on building domestic manufacturing capabilities and reducing import dependence. The next phase is expected to be characterised by large-scale deployment of advanced indigenous systems across the armed forces. The outlook got another lift recently when the Defence Acquisition Council cleared AoN proposals worth Rs.52,000 crore.
According to 360 One Capital, the sustained increase in procurement approvals over the past few years points to a healthy pipeline of contracts. The strength of the sector’s order books is one of its biggest attractions. Large order backlogs provide companies with long-term revenue visibility and reduce business uncertainty.
Amit Anwani, Research Analyst at PL Capital, estimates that the sector can deliver revenue growth of 15-20% annually over the medium term. He expects earnings growth to exceed revenue growth as companies benefit from operating leverage, higher localisation and a more favourable product mix.
Growth opportunities are spread across several segments. Sorbh Gupta, Head–Equity at Bajaj Asset Management, believes changing warfare patterns and the increasing use of cost-effective weapon systems are reshaping defence strategies worldwide. As a result, segments such as drones, counter-drone systems, electronic warfare solutions and artificial intelligence- enabled defence technologies are expected to see significant growth. Anwani identifies missiles and precision-guided munitions, naval shipbuilding, aerospace manufacturing, and maintenance, repair and overhaul (MRO) services as segments that could benefit from sustained demand.
Export opportunity
Indian defence companies are targeting global markets through technology partnerships, localisation and indigenous product development. Backing this shift, the government aims to raise defence exports to Rs.50,000 crore by FY2028-29. Analysts believe the target is achievable.
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According to Kotak Securities, Indian manufacturers enjoy cost advantages across several categories, including missiles, drones, radars and ammunition. The brokerage also highlights rising international interest in Indian defence platforms and gradual easing of export regulations as important catalysts. Historically, ammunition has accounted for a large share of exports. Going forward, analysts expect a greater contribution from higher-value products such as missiles, artillery systems, radars, naval platforms, electronic warfare equipment and unmanned systems. The shift reflects the increasing sophistication of Indian defence manufacturing.
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Premium valuations persist
The sector’s strong prospects are reflected in valuations. The Nifty India Defence Index currently trades at a price-to-earnings multiple of around 56 times. This is roughly 5% above its one-year average valuation and about 26% higher than its five-year average. Despite the premium, analysts believe valuations remain supported by fundamentals. Anil R., Senior Research Analyst at Geojit Investments, says investors are willing to assign higher valuations because of confidence in the sector’s long-term growth potential. Rising defence expenditure, robust order inflows, expanding exports, increasing localisation and improved earnings visibility continue to underpin the growth story.
Investors’ approach
Experts recommend focusing on companies with strong execution capabilities, diversified product portfolios and sizeable order books. These characteristics can provide resilience across business cycles and improve earnings visibility. Anil R. suggests limiting exposure to around 5-8% of an overall portfolio for most retail investors.
A long-term investment horizon is equally important. Anwani believes market corrections can provide attractive entry opportunities into fundamentally strong defence businesses. However, he cautions that entry valuations will remain a key determinant of future returns. Investors should also avoid concentrating exposure in just one or two stocks. Gupta recommends diversifying across different segments—including defence public sector undertakings, private-sector manufacturers, component suppliers and companies across market-cap categories—to manage risk more effectively.
While the outlook remains favourable, risks such as project delays, procurement bottlenecks, import dependence, rising competition and export uncertainties could affect growth and stock performance. Here is how the three defence stocks of the Nifty India Defence Index with highest number of buy ratings on Bloomberg are placed: Bharat Electronics
Revenue grew 25% YoY in the June 2026 quarter on faster project execution.
FY2026-27 sales and order-inflow guidance held steady.
Export pipeline strong, with potential orders worth $465 million.
Elara Capital likes it for the growth outlook, improving margins, strong order pipeline and expanding exports.
Rs.2.5 trillion order book gives strong revenue visibility.
Maintenance, repair and overhaul (MRO) business adds stable revenue.
Prospective pipeline of Rs.4.6 trillion over the next 5-6 years.
Kotak Securities expects 15% CAGR profit growth (FY2025-26 to FY2029-30), driven by the order book, a higher manufacturing share and strong cash flows.
Ashish Kacholia exits defence stock that rallied 108% in Q1. Do you own it?
