Passive defence play
Nifty India Defence index, in the four years since launch, has grown at an astounding pace of 52 per cent CAGR compared to 8.2 per cent for Nifty 50 in the period. Defence sector is in the midst of an upcycle that is likely to sustain at least in the medium term.
But the index valuations (one year forward PE) at a 30 per cent premium to last four-year average (44 times versus 34 times average) should temper investor interest despite the strong outlook.
We examine the primary sector drivers and provide an outlook for key index constituents. Alongside, we highlight mutual funds tracking the sector for investors seeking an exposure.
Sector drivers
Defence spending has been elevated in India and also rest of the world. In India, capital outlay for defence services has grown at 10 per cent CAGR in FY21-26 which includes a 22-per cent growth this year.
European nations of NATO alliance have committed to increase their proportion of defence spending from 2 per cent to 5 per cent of GDP by 2035. With US, Russia and Israel locked in conflicts of their own, defence spending is on an upward cycle across major economies.
Domestically, the higher spending has been complemented by a policy of indigenisation as well which mandates Indian design, developed and manufactured supply chain.
Positive indigenisation lists, PLI schemes, dedicated defence corridors, defence acquisition procedure and gradual opening of export markets for private and public defence companies have provided strong policy support to the growth that should support strong margins.
Sector constituents
As on March 30, 2026 Nifty India Defence index has 19 constituents with Bharat Electronics (BEL), HAL, Bharat Forge, Solar Industries and Mazagon Dock accounting for 20, 20, 16, 11 and 6 per cent of index by weight respectively.
The common factor for the key constituents is a large order book that provides revenue visibility for next three to four years. BEL is central to the three-armed forces with its competency as a integrator of electronic systems and subsystems.
With LCA Tejas, next-generation Corvettes, and missles, BEL order book spans the three branches of the armed forces. In the next wave of orders; Project Kusha, AMCA and P-75I submarine will involve sizeable orders for systems integration for BEL.
For HAL, on one side, the significant shortfall of fighter squadrons for Airforce places a large demand on deliveries which may start ramping in FY27.
But on the other hand, significant delays in GE engines for Tejas and risk of private competition or order delays/downsizing are an overhang on HAL.
The company has visibility from other more reliable platforms including Sukhoi upgrades and Prachand light combat helicopters, that alleviate the risk to an extent. On the sea front, current and expected order book from Indian Navy that includes P17A frigates nearing completion for one of four orders and next generation submarine P-75I which is expected to be announced shortly, support a healthy order book visibility for Mazagon and also Cochin Shipyard and GRSE in next few years. The timely contract signing and order book execution are key monitorables.
While the large companies anchor the large projects, the indigenisation policy has allowed new private players to expand their addressable markets in defence contracts.
Bharat Forge's current defence contribution is around 10 per cent of revenues.
The company has secured orders in diverse defence verticals including drones, unmanned vehicles, small guns, and ATAGS (Advanced Towed Artillery Gun System). The defence proportions should grow to 20-30 per cent of revenues in the medium term as per the company.
This, in addition to its auto and industrial business, are also in an upcycle.
Similarly, Data Patterns should benefit from the larger orders of radar and electronic warfare suites for aircraft and submarines. Zen Technologies primarily focusses on simulators and anti-drone systems.
The company has recently bagged a licence to manufacture cannons for air defence expanding its addressable market. Astra Microwave's software-designed radio systems or Paras' optronics systems are in the next phase of development.
Fund options
While the sector is enjoying strong momentum, there are only a few mutual funds. Aditya Birla, Groww and Motilal Oswal have passive funds tracking Nifty India Defence sector while HDFC Defence Fund is the only active option in the sector. All the funds were launched only in the last 3-4 years. Axis MF also launched a passive fund recently. Our analysis is constrained by the shorter performance track record.
In the limited timeframe for analysis, HDFC Defence fund has underperformed the Nifty India Defence index significantly. The daily one-year rolling return average since the fund launch at 38.5 per cent is still lower compared to index average of 56.2 per cent. Amongst the passive funds, Motilal Oswal has tracked the index closely in its period of performance.We recommend investors gain a passive exposure to the sector. The sector revenue momentum should last through next 3-4 years with the current order book and geopolitical climate. With valuations at a high, investors can wait for it to cool down and gain a margin of safety for long-term exposure.
Points to note We recommend investors gain a passive long-term exposure to the sector, only when when valuations cool Comments
Published on April 25, 2026
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