Defence Stocks Rally Up to 68% Ahead of Union Budget 2026

Defence Sector in Focus Ahead of Budget

Indian defence stocks experienced a significant rally as the market anticipates a substantial increase in the sector's allocation in the upcoming Union Budget for 2026-27. With the Cabinet's approval of the budget document, investor sentiment turned bullish, pushing the Nifty India Defence index up by 1.9%. The index had already registered a 5.6% gain in January, signaling strong investor confidence in the sector's growth prospects.

Market participants are pricing in an 8-20% hike in defence capital outlay over the previous fiscal year's Rs 1.8 lakh crore. This optimism is rooted in the government's consistent push towards self-reliance ('Make in India') and the modernization of the armed forces.

Broad-Based Rally Lifts Key Stocks

The positive sentiment was reflected across the board, with 22 aerospace and defence stocks trading higher. MTAR Technologies was a standout performer, jumping 7.36% to Rs 3,148.90. Drone manufacturer Ideaforge Technology also saw strong buying interest, with its shares rising 4.60% to Rs 483.40. Other notable gainers included Data Patterns (India) Ltd, which climbed 4.5%, and Paras Defence and Space Technologies Ltd, which gained around 3%.

Industry heavyweights like Bharat Electronics Ltd (BEL), Hindustan Aeronautics Ltd (HAL), and Garden Reach Shipbuilders and Engineers Ltd (GRSE) also advanced, gaining up to 2%. The rally underscores a widespread belief that increased government spending will translate into robust order books and improved revenue visibility for these companies. However, not all stocks participated, as Bharat Dynamics Ltd slipped 1.61% following its December quarter results.

Stellar Returns in the Past Year

The current rally builds on a year of exceptional performance for the defence sector. Since the last budget, several stocks have delivered multi-bagger returns, rewarding investors who recognized the sector's structural tailwinds early on. The performance highlights a sustained re-rating of the sector driven by policy support and a strong order pipeline.

What Analysts Expect from Budget 2026

Brokerage firms are largely positive on the sector's outlook, citing geopolitical tensions and the government's indigenisation policy as key drivers. Anand Rathi expects a capital outlay increase of over 15%, driven by a strong pipeline of clearances from the Defence Acquisition Council (DAC) and the need for equipment modernization.

Choice Broking projects a potential 20% year-on-year increase in defence spending for FY27. The firm believes spending will diversify towards systems, sub-systems, and lifecycle components, reducing the episodic nature of revenues for defence companies. Experts suggest the total defence budget could exceed Rs 7 lakh crore, with capital expenditure for arms procurement potentially crossing Rs 2 lakh crore.

Top Stock Picks by Brokerages

Several analysts have identified their top picks ahead of the budget. Axis Securities favors BEL and MTAR Technologies as its primary bets. Emkay Global noted that an increased focus on aerial warfare would benefit companies like Paras Defence, Astra Microwave Products, and Data Patterns. Meanwhile, any announcements related to shipbuilding are seen as positive for Cochin Shipyard and Mazagaon Dock.

A Note on Prudent Investing

While the outlook for the defence sector is strong, investors are advised to remain selective. The past year has also seen significant corrections in some stocks, such as Zen Technologies (-24%) and Cyient DLM (-28%). This divergence underscores the importance of evaluating a company's execution capabilities and financial health rather than relying solely on its order book. The ability to deliver on contracts efficiently will be crucial for sustained performance.

Conclusion

The rally in defence stocks is a clear indicator of high market expectations from the Union Budget 2026. A significant increase in capital allocation, coupled with continued policy support for domestic manufacturing, could provide further momentum to the sector. Investors will be closely watching the Finance Minister's announcements on February 1, as they will set the tone for the sector's trajectory in the coming fiscal year.