Indian investors are rushing into high-value defense stocks

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Retail investors in India are pumping their money into defense stocks after Prime Minister Narendra Modi's efforts to manufacture indigenous weapons sent the sector index up by about 56 percent in a year.

At least four major asset managers have launched sector-specific funds, as experts expect India's defense production to grow by up to 20 per cent annually until the end of the decade.

India It shares a long and tense border with an increasingly aggressive China, and with ongoing conflicts in the Middle East and Ukraine, there is a strong demand for weapons at home and abroad.

But while New Delhi has been the world's largest arms importer for more than two decades, Moody It is now pressuring the army to buy more weapons at home. He hopes defense will help transform India into a global manufacturing hub.

The trend towards localization has led to an increase in purchase orders for large local companies such as Hindustan Aeronautics, which produces fighters, helicopters and jet engines; Bharat Dynamics, which makes munitions and missiles; and Mazagon Dock Shipbuilders, the nation's largest marine shipyard.

This sector has long been the preserve of state-owned companies, which still account for 85% of arms production, and Modi has opened this sector to India. Private companiesincluding the likes of Adani Group, Larsen & Toubro and Tata Sons. The Prime Minister set an annual target of about $35 billion by the end of the decade for domestic defense production, up from about $20 billion this year.

Balasubramanian, chief executive of Aditya Birla Sun Life Asset Management – which launched a defense fund in August – said the “large and very growing order book” at blue chip companies was a “selling point” for investors.

But he noted that state-owned companies still dominate the sector and that the government maintains a stake of about 80 percent in some of the largest companies.

“Unlike most other really open spaces, this is not completely open space,” Balasubramanian said.

The limited free float in the defense sector means there is a risk that shares could rise on relatively small amounts of investor buying.

With a market capitalization of $31.9 billion, Hindustan Aeronautics shares now trade at about 10 times book value, on a price-to-earnings multiple of 36 times. This means that investors have to pay Rs 36 for one rupee of current earnings.

HDFC, one of the country's largest asset managers, was the first to launch a defense-focused fund in June 2023, and has given its investors an annual return of nearly 73 per cent since then.

He said the fund generated so much interest that HDFC closed it to new investments last July, due to risks arising from “the current market valuation, volatility and narrow world”.

Three other asset management groups launched similar schemes after HDFC, tracking the only sector index run by the National Stock Exchange. Motilal Oswal, a stockbroker and asset manager, promotes his fund by asking: “Isn't it? India is investing in defence?”

With returns of nearly 56 per cent this year, the Nifty India Defense Index has significantly outperformed the 10 per cent return on the broader Nifty 50 index over the same period.

India is slowly upgrading its aging military equipment, and is in dire need of purchasing new fighter jets, tanks, warships and artillery guns, as nearly two-thirds of its military equipment is classified as obsolete.

The government has allocated about $20 billion for military modernization for the fiscal year ending March 2025 — a marginal increase from $19 billion last year — of which 75 percent is allocated to domestic industry.

A banker who runs a defense fund said the overall market capitalization of the sector was at a minimum 18 months ago, but since then “we have seen a very sharp jump, not just in valuation, but even in the number of funds tracked.”

Aside from the large financial returns, individual buyers also cling to a sentimental, nationalistic motive, even when banks choose not to advertise it. The banker said investors feel that indirect funding to local arms makers “will help them protect our borders.”