Defence Stocks Rally Ahead of Budget 2026 on Capex Hopes

Introduction

Defence sector stocks have gained significant investor attention ahead of the Union Budget presentation on February 1, 2026. A broad-based rally across the sector is fuelled by expectations that Finance Minister Nirmala Sitharaman will announce a substantial increase in capital outlay for defence. This optimism is rooted in the government's consistent push towards accelerating domestic manufacturing and achieving self-reliance in defence production.

The Pre-Budget Market Rally

On Friday, the Nifty India Defence Index registered its largest weekly gain since May 2025, climbing over 1.5% to an intraday high of 8,193.50. The index has already surged more than 21% since the last Union Budget, reflecting sustained investor confidence. Individual stocks have posted even more impressive returns. Drone manufacturer ideaForge Technology led the gains with a 5% climb, while MTAR Technologies saw a jump of over 7%. Other prominent players like Bharat Electronics (BEL), Bharat Dynamics (BDL), and Garden Reach Shipbuilders & Engineers (GRSE) also saw their shares rise by over 2%.

What's Fuelling the Optimism?

The market's bullish sentiment is backed by analysis from several brokerage firms. Emkay expects defence expenditure to grow at a steady 12% to 13% year-on-year over the next three to four years. Similarly, Nuvama Institutional Equities anticipates that the upcoming budget will accelerate spending in the sector. Anand Rathi has projected an even more optimistic scenario, expecting a rise of over 15% in capital outlay. These forecasts are aligned with statements from former Defence Secretary Giridhar Aramane, who indicated that future capital expenditure could rise to 15-20% or more, provided the industry has the capacity to absorb the funds.

A Look at Past Allocations

To understand the context, the Union Budget for 2025 allocated ₹6.81 lakh crore to the defence sector, a 9.5% increase from the previous year. Of this, ₹1.48 lakh crore was earmarked for the modernisation of the armed forces. Since 2020, India's defence spending has increased by over 40%, with an average annual growth of about 9.2%. However, data from PRS Legislative Research highlights a concern: the share of defence spending dedicated to capital outlay has fallen from 32% in FY14 to below 30% in FY26. A significant increase in this year's budget would be seen as a corrective measure to address this trend and fund new procurement schemes.

Key Stocks on the Radar

Investors are closely monitoring a range of companies poised to benefit from higher allocations. Public Sector Undertakings (PSUs) like Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Mazagon Dock, and Garden Reach Shipbuilders & Engineers (GRSE) remain central to the government's procurement plans. In the high-growth drone and unmanned aerial vehicle (UAV) segment, companies such as ideaForge, Zen Technologies, and Data Patterns are in focus. Other key private sector players include MTAR Technologies and Solar Industries, which have demonstrated strong performance and robust order books.

Performance Since Last Budget

Several defence stocks have delivered substantial returns over the past year, underscoring the sector's strong performance leading up to this budget.

Analyst Perspectives and a Note of Caution

While the outlook is largely positive, some market experts advise caution. G Chokkalingam of Equinomics Research noted that pre-budget rallies in defence and railway stocks have often fizzled out post-announcement. He pointed to fiscal constraints and slowing tax collection growth as potential limiting factors for a massive hike in defence spending. The advice for investors is to remain stock-specific, evaluate valuations carefully, and consider booking partial profits after the recent sharp run-up, rather than relying solely on a budget-driven sectoral wave.

The Road Ahead

As the Finance Minister prepares to present her ninth consecutive budget, the defence industry will be watching for clear signals on capital allocation, particularly for modernisation and new schemes. Key areas of focus include funding for aircraft and helicopter fleets, missiles and ammunition, and advanced capabilities like C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) and drone systems. The budget's details will ultimately determine whether the current market momentum is sustained.

Conclusion

The Indian defence sector stands at a critical juncture, with high hopes pinned on the Union Budget 2026. The strong pre-budget rally indicates that investors have already priced in a significant increase in government spending. The announcements on February 1 will confirm whether this optimism is justified and will set the trajectory for the sector's performance in the coming fiscal year.