Defence outperforms sectoral indices; surges 34.82% in six months, far ahead of Nifty – is the rally sustainable?

India’s defence sector has taken pole position among all sectoral indices, delivering a 34.82% return over the past six months — a performance that stands out against Nifty’s 5.49% gain and declines in IT and pharma. While most sectors struggled or stayed flat, defence stocks rallied on the back of strong order visibility, execution, and policy support.Leading the charge were public sector undertakings (PSUs) such as Hindustan Aeronautics (HAL), Bharat Electronics (BEL), and Bharat Dynamics (BDL). These companies have benefitted from government procurement momentum and operational improvements, translating into margin gains and earnings growth.According to ET, analysts credit the sector’s outperformance to improved investor visibility into long-term contracts, healthy cash flows, and a broader re-rating of PSU stocks across segments.Here’s how key sectors performed in the first half of calendar year 2025:Here’s how key sectors performed in the first half of calendar year 2025:

Source: ET, H1 CY25 performanceThe government’s push for self-reliance under Make in India and Atmanirbhar Bharat has further lifted sentiment around defence manufacturing. “PSU defence companies like HAL, BEL, and BDL have reported healthy order books, margin expansion, and earnings growth,” said Sagar Shinde, VP of Research at Fisdom. “Additionally, heightened geopolitical tensions have further increased interest in the sector, both domestically and globally,” he added.Defence fund returns hit 39% as retail bets riseThe stock rally has powered sharp gains for mutual funds with exposure to defence. Over the past three months, returns from sectoral schemes have reached as high as 39%, with the category average at 36.98%.Motilal Oswal’s Nifty India Defence ETF delivered a 38.58% return, followed closely by Groww’s ETF and ETF FoF products at 38.48% and 38.32%, respectively. The HDFC Defence Fund, the only actively managed offering in the category, gained 30.04%.Much of the inflow has come on the back of themes like indigenisation, military modernisation, and defence exports. But experts caution that such momentum-driven bets carry risks for most investors. “These sectors often experience cyclical performance and require timely entry and exit to capitalize on momentum, which can be difficult for most investors to navigate,” said Hrishikesh Palve of Anand Rathi Wealth. “Chasing current momentum in such sectors is not advisable,” he added.Export deals and NATO boost lift outlookOn the international front, a recent NATO announcement on long-term defence spending increases has opened new opportunities for Indian exporters. With several firms now integrated into global defence supply chains, analysts expect further traction in overseas orders.India’s $5 billion defence export target by 2025 has added to the optimism. Deals with countries across Africa, Southeast Asia, and the Middle East have widened the sector’s global footprint in recent months.Analysts flag possible pause after steep runDespite its strong showing, the sector may be nearing a consolidation phase as valuations stretch. “The optimism around future order wins, export growth, and policy tailwinds may already be priced in,” said Palve. “A phase of mean reversion would not be surprising,” he added.The outlook for defence remains closely tied to policy direction, execution strength, and international demand. Whether it can sustain leadership across sectors will depend on how companies capitalise on both domestic initiatives and global defence trends.(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)