Budget 2026: Top Capital Goods and Defence Stocks to Watch for Growth

Finance Minister Nirmala Sitharaman presented the Union Budget 2026-27 on February 1, 2026, signaling a continued commitment to infrastructure-led growth. The budget avoided populist giveaways, focusing instead on fiscal consolidation and supply-side reforms. For the stock market, the primary highlight was the substantial increase in public capital expenditure, which is set to drive momentum in the capital goods, defence, and railway sectors. Analysts from top brokerages like Jefferies, CLSA, and Nomura have identified specific stocks that stand to benefit from these structural shifts.

The ₹12.2 Lakh Crore Capex Vision

The standout announcement of Budget 2026 is the increase in the public capital expenditure outlay to ₹12.2 lakh crore for FY27. This represents a nearly 10% jump from the ₹11.1 lakh crore allocated in the previous fiscal year. The government aims to maintain capex at approximately 3% of GDP, focusing on roads, railways, and urban infrastructure. This sustained push provides long-term revenue visibility for engineering and construction giants. Analysts observe that the focus has shifted from mere headline allocations to execution and project completion.

Railways: High-Speed Corridors and Bullet Trains

The railway sector received a significant boost with a focus on high-speed rail corridors and dedicated freight corridors. A key initiative is the ₹20,000 crore kick-start for projects involving seven new bullet trains. This is expected to accelerate project execution and unlock large EPC order inflows for track laying, signaling, and station development. Companies involved in rolling stock and electrification are positioned to benefit from the expansion of the semi-high-speed rail network and safety upgrades like the Kavach 4.0 system.

Defence: Strengthening the Atmanirbhar Narrative

Defence remains a core theme with an expected 15-18% increase in capital allocation, reaching approximately ₹1.8 lakh crore to ₹2.3 lakh crore. The budget emphasizes self-reliance (Atmanirbharta) by adopting modern techniques such as artificial intelligence and robotics. This growth in defence capex is intended to reassure the market regarding the continuity of order books for major public sector undertakings. Analysts suggest that the focus will remain on the pace of contract closures and the delivery of large platform orders across the Army, Navy, and Air Force.

The Digital Backbone: Data Centers and Electronics

The budget introduced measures to promote the data center ecosystem, with an expected investment of ₹2.2 lakh crore over the FY26-39 period. This is a significant positive for companies providing electrical equipment and power solutions. Additionally, the government has increased the outlay for the electronics components manufacturing scheme to ₹40,000 crore. This move is designed to deepen the value chain and support the India Semiconductor Mission (ISM) 2.0, which covers equipment, materials, and intellectual property.

Brokerage Recommendations: Jefferies, CLSA, and Nomura

Leading brokerages have released their top picks following the budget announcements. Jefferies highlighted Siemens Energy, Hitachi Energy, HAL, and L&T as preferred plays in the power and defence space. CLSA reiterated an outperform rating on builders like L&T and HAL, noting that execution recovery in 2026 could surprise the market positively. Nomura identified HAL as its top pick in defence, while CG Power and GE Vernova T&D India were favored in the capital goods segment due to their presence in the data center market.

Sectoral Impact and Key Stocks

Green Energy and Sustainability Initiatives

Aligning with net-zero targets, the budget introduced a ₹20,000 crore outlay over five years for Carbon Capture, Utilisation, and Storage (CCUS) technologies. This initiative targets the power, steel, and cement industries. Furthermore, customs duty exemptions on capital goods for lithium-ion cell manufacturing were extended. These measures support domestic production in the renewable energy sector, benefiting companies involved in solar glass inputs and battery storage systems.

Healthcare: The Biopharma Shakti Mission

The pharmaceutical sector received a boost through the 'Biopharma Shakti' mission, with an outlay of ₹10,000 crore over five years. This initiative aims to drive research and development, particularly for non-communicable diseases. The budget also proposed the establishment of five regional medical value tourism hubs. These steps are expected to benefit large pharmaceutical companies and hospital chains that are expanding their bed capacity and international patient share.

Market Impact and Capital Market Changes

While the budget was largely positive for industrial sectors, it contained a negative surprise for capital market intermediaries. The Securities Transaction Tax (STT) on Futures and Options (F&O) contracts was hiked, which is expected to impact trading volumes. This move led to a cautious reaction in stocks of exchanges and brokerage houses. However, the commitment to a fiscal deficit target of 4.3% for FY27 was welcomed by bond markets, as it helps anchor interest rates and supports overall credit growth.

Summary of Brokerage Top Picks

Conclusion

Union Budget 2026 serves as a document of continuity, doubling down on the strategy of investment-led growth. The clear winners are sectors tied to infrastructure, domestic manufacturing, and green energy. While the hike in STT may cause short-term volatility in the financial sector, the long-term structural themes remain intact. Investors are encouraged to focus on companies with strong execution capabilities and healthy balance sheets that can translate the government's massive capex outlay into sustainable earnings growth.