Defence Stocks Surge Ahead of Union Budget 2026 on Spending Hopes

Introduction: Pre-Budget Optimism Fuels Rally

The Indian defence sector is experiencing a significant surge in investor interest as the Union Budget for 2026 approaches. Shares of defence-related companies have rallied, pushing the Nifty India Defence index up by over 2% to 8,354.15 in intra-day trading. This upward momentum comes amid widespread expectations that the government will announce a substantial increase in defence spending, driven by geopolitical factors, military modernization needs, and a continued push for domestic manufacturing.

Broad-Based Gains Across the Sector

The rally is not confined to a few large players but is visible across the sector. Stocks like Unimech Aerospace and Manufacturing, Mtar Technologies, and Data Patterns (India) surged between 5% and 6%. Other prominent companies, including Paras Defence and Space Technologies, Solar Industries, Bharat Electronics (BEL), Mazagon Dock Shipbuilders, and Hindustan Aeronautics (HAL), recorded gains of 2% to 3%. This performance stands in contrast to the broader market, with the Nifty India Defence index's 1.6% gain significantly outpacing the Nifty 50's modest 0.17% rise during the same period.

The Budget Catalyst: What Are the Expectations?

Market sentiment is primarily driven by expectations surrounding the Union Budget, which Finance Minister Nirmala Sitharaman is set to present on February 1. Analysts and brokerage firms anticipate a significant hike in the defence capital outlay. Choice Institutional Equities projects a potential 20% year-on-year (YoY) increase in spending. This forecast is based on the evolving security landscape, the necessity for force modernization, and the government's 'Atmanirbhar Bharat' (self-reliant India) initiative, which prioritizes indigenisation.

Brokerage firm JM Financial has estimated the defence allocation for FY27 at ₹1,85,400 crore, a 9% increase over the previous budget. Similarly, Nuvama Institutional Equities expects an 8% growth in defence capex, with higher allocations towards research and development (R&D), unmanned aerial vehicles (UAVs), and anti-drone systems. Anand Rathi Research is even more bullish, anticipating a rise of over 15% in capital outlay for the sector.

Strong Fundamentals and Order Books

Beyond budget speculation, the rally is supported by strong underlying fundamentals for many defence companies. Several firms boast robust order books that provide clear revenue visibility for the coming years.

• Bharat Electronics (BEL): The company has an order book approximately 3.1 times its FY25 revenue. It anticipates an additional order inflow of ₹30,000–₹32,000 crore for Quick Reaction Surface-to-Air Missile (QRSAM) systems in the near term.
• Bharat Dynamics (BDL): With an order book around 8 times its FY25 revenue, BDL has strong long-term visibility. Management has guided for an additional order inflow of ₹20,000 crore by FY27, with major orders for QRSAM, Aakash-NG, and MRSAM in the pipeline.
• Data Patterns (India): The company's order book is about 1.8 times its FY25 revenue. It has a strong pipeline of orders worth ₹2,000–₹3,000 crore expected in the short-to-medium term.

A Look at Historical Performance

History suggests that the defence sector often performs well around budget announcements. Following the budgets in FY2022 and FY2023, the sector posted double-digit weekly gains. The performance since the last budget in 2025 has also been impressive. MTAR Technologies emerged as a top performer with 68% returns, followed by BEL (61%) and Garden Reach Shipbuilders & Engineers (58%). This pattern underscores how fiscal policy commitments act as a powerful catalyst for the sector.

Technical Indicators Signal Bullish Momentum

The current rally is also backed by positive technical signals. Analysts have pointed to a "Golden Crossover" on the Nifty India Defence Index chart, where the 10-day and 21-day moving averages have crossed above the 100-day Simple Moving Average (SMA). This is widely regarded as a classic buy signal indicating a potential sustained uptrend. Furthermore, the Moving Average Convergence Divergence (MACD) line has turned positive, and the index is trading comfortably above its 50-day and 200-day SMAs, confirming the primary bullish trend. Immediate resistance levels are seen at 8,350 and 8,450, while a strong support base exists in the 7,300–7,400 range.

| Key Defence Stock Performance (Post-Budget 2025) | | :--- | :--- | | Company | Approximate Return | | MTAR Technologies | 68% | | Bharat Electronics Ltd (BEL) | 61% | | Garden Reach Shipbuilders & Engineers (GRSE) | 58% | | Solar Industries | 38% | | Astra Microwave Products | 33% | | Paras Defence and Space Technologies | 30% | | Bharat Dynamics Ltd (BDL) | 25% |

Strategic Context and Future Outlook

The push for higher defence spending is not just a fiscal exercise but a strategic necessity. Heightened geopolitical tensions and security challenges in India's neighborhood, including events like 'Operation Sindoor', have reinforced the need for a modernized and self-reliant military. The government's goal to increase defence exports to over ₹50,000 crore by FY29 further supports the long-term growth narrative for the sector.

Investor Playbook: Bull vs. Bear Scenarios

Bull Case: If the Union Budget delivers a defence capex hike of 15% or more and announces concrete indigenisation targets, the Nifty Defence Index could rally another 6-8%. A technical breakout above the 8,450 resistance level could propel it towards its historical high of 8,600.

Bear Case: A muted budget allocation or delays in policy announcements could stall the current momentum. A breach of the 7,300 support level could trigger a corrective pullback of 4-5%, particularly affecting stocks with weaker fundamentals.

Conclusion

The rally in Indian defence stocks is a clear reflection of market optimism ahead of the Union Budget 2026. This sentiment is built on strong expectations of increased government spending, a supportive policy environment for domestic manufacturing, and solid corporate fundamentals. While the budget announcement on February 1 remains the key trigger, the long-term structural shift towards self-reliance and modernization provides a robust foundation for the sector's continued growth.