Defence Stocks Surge Up to 68% Ahead of Budget 2026

Pre-Budget Rally Ignites Defence Sector

With the Union Budget 2026 announcement on February 1st drawing near, the Indian defence sector is experiencing a significant surge in investor interest. Stocks linked to defence manufacturing and technology have been outperforming broader market indices, driven by expectations of increased government spending and a continued policy push towards self-reliance. The Nifty India Defence Index has registered strong gains, reflecting a bullish sentiment that anticipates favourable announcements from the Finance Minister.

This pre-budget rally is not just speculative; it is rooted in the sector's strengthening fundamentals, robust order books, and the government's unwavering focus on modernising the armed forces through its 'Make in India' initiative. Investors are positioning themselves to capitalize on what they believe will be another year of substantial capital allocation for defence.

Stellar Performance Over the Past Year

The momentum in defence stocks is not a recent phenomenon. Since the last budget, several companies have delivered remarkable returns, rewarding investors who entered the space early. The performance underscores a structural shift in the sector's growth trajectory, moving from reliance on imports to building a robust domestic industrial base.

Other prominent names like Hindustan Aeronautics Ltd (HAL), Bharat Dynamics Ltd (BDL), and Data Patterns have also posted noteworthy gains, contributing to the sector's overall outperformance.

What's Fuelling the Optimism?

Several factors are converging to create a positive outlook for the defence sector ahead of the budget. The primary driver is the consistent increase in the defence capital outlay over the past few years. Analysts widely expect this trend to continue, with some projections suggesting a 10-20% hike in capital expenditure for FY27. This increased allocation is crucial for funding large-scale procurement and modernisation projects.

Secondly, defence public sector undertakings (DPSUs) and private companies boast strong and visible order books, providing revenue assurance for the next several years. Multi-year contracts for fighter jets, naval warships, missile systems, and electronic warfare suites have created a deep pipeline of work. Finally, policy tailwinds such as the positive indigenisation lists, which restrict the import of certain items, and incentives for exports are creating a captive market for domestic manufacturers.

Key Expectations from Budget 2026

All eyes are on the Finance Minister's speech for specific cues that could further energize the sector. The market will be closely watching the total capital allocation for defence, with estimates ranging from ₹1.85 lakh crore to over ₹2.1 lakh crore. A number in this range would signal the government's commitment to military modernisation.

Beyond the headline number, the focus will be on allocations for specific domains. Increased spending on research and development (R&D) is anticipated to foster innovation in deep tech areas like AI-based surveillance, drone swarms, and space defence. The government is also expected to reinforce its support for shipbuilding and aerial platforms, benefiting companies like Mazagon Dock, Cochin Shipyard, and HAL. The ambitious defence export target of ₹50,000 crore by 2028-29 may also see new incentives to help Indian firms compete globally.

A Shift Towards Execution and Exports

While strong order inflows have been the primary narrative, the market's focus is gradually shifting. Investors are now looking for tangible signs of execution, timely delivery, and margin improvement. The story is no longer just about winning government contracts but about delivering on them efficiently. The rally is also becoming more selective, with a discernible