In a remarkable display of market optimism, prominent defence stocks experienced a significant rally during the Budget week, with several counters soaring as much as 26%. This surge was driven by growing expectations that the defence sector could become a primary beneficiary of Budget 2026, with analysts forecasting a potential increase in defence capital expenditure of up to 20%.
Defence Stocks Outperform in Budget Week
The gains were widespread across the sector, reflecting robust investor confidence. During the Budget week, MTAR Technologies led the charge with a 26% surge, while Garden Reach Shipbuilders rose 23%. Data Patterns advanced nearly 23%, Apollo Microsystems gained 15%, and Mazagon Dock climbed around 12%. Shares of Bharat Dynamics and Cochin Shipyard both increased by about 10%, with Bharat Electronics adding 9.5%, BEML rising 9%, and Hindustan Aeronautics jumping 7%. This strong performance underscores investor belief that execution visibility and order inflows could improve substantially if Budget allocations exceed expectations.
Key Areas for Higher Allocations
Investors are pricing in the possibility of a sizeable jump in defence capital expenditure, with key areas expected to receive higher allocations. These include missiles and ammunition, unmanned aerial vehicles (UAVs) and counter-UAV systems, electronic warfare, air defence, network-centric systems, and technology-driven force-multiplier equipment. The focus is on modernisation and indigenisation, aligning with broader national security goals.
Budget 2026 Expectations for the Defence Sector
Brokerages remain optimistic about the defence sector's outlook ahead of Budget 2026, anticipating a disciplined fiscal approach coupled with increased capital allocation to strategic areas. With rising modernisation needs and a policy shift towards indigenisation and advanced technologies, analysts believe defence spending could see a meaningful step-up, supporting earnings visibility across the sector.
Analyst Insights and Projections
Motilal Oswal noted that the Budget arithmetic is likely to be realistic, assuming nominal GDP growth of around 10.1%. Under the broader "Viksit Bharat" framework, it does not expect populist measures or direct tax cuts but sees room for higher capex allocations to strategic sectors such as defence, nuclear energy, and critical minerals. The brokerage expects defence expenditure to rise by about 15% over the estimated ₹1.8 lakh crore spending in FY26, even after accounting for a one-time emergency procurement of ₹40,000 crore this year.
Nuvama echoed this positive outlook, projecting double-digit growth in defence capital outlay as the modernisation drive accelerates. It anticipates large programmes in the pipeline to start materialising from FY27, with sustained focus on indigenisation, higher R&D spending, and exports. UAVs, drones, anti-drone systems, and advanced technologies are likely to remain priority areas, while initiatives such as iDEX are expected to gain momentum. The brokerage also highlighted the need to fast-track programmes like QRSAM, naval platforms, and missile systems, with a bias towards the Air Force and Navy, paving the way for execution-led earnings growth.
Stocks to Watch Ahead of Budget 2026
Emkay Global suggested that a sharper focus on aerial warfare would benefit companies such as Zen Technologies, Astra Microwave Products, Data Patterns, and Paras Defence. The brokerage noted that the government is expected to roll out the Drone Shakti Mission, featuring a five-year incentive programme of ₹10,000 crore. It also flagged opportunities in shipbuilding, pointing to an already approved ₹69,800 crore package, and emphasised that long-term, low-cost financing for ports and shipbuilding would be critical. Cochin Shipyard, Mazagon Dock, and Larsen & Toubro were identified as key beneficiaries.
Meanwhile, Motilal Oswal indicated that higher defence capex would benefit defence public sector undertakings (DPSUs) like Bharat Electronics, Bharat Dynamics, and Hindustan Aeronautics. Axis Securities highlighted Bharat Electronics and MTAR Tech as preferred defence plays ahead of Budget 2026.
Disclaimer: The views and recommendations mentioned are those of individual analysts or broking companies and not of Mint. Investors are advised to consult certified experts before making any investment decisions.
