Defence stocks are witnessing a resurgence after a sharp correction, driven by the European Union's ambitious $850 billion (€800 billion) defence rearmament plan. This initiative, aimed at bolstering Europe's military capabilities amid rising geopolitical tensions, has rejuvenated investor confidence in the sector.

In 2024, defence stocks surged due to heightened global tensions and increased exports but later faced a sell-off due to high valuations and profit-booking. Now, with Europe ramping up defence spending to ensure strategic autonomy and support Ukraine, Indian defence companies are poised to benefit from this global rearmament wave.

ICICI Securities expects the incremental spending to be directed more towards building capabilities and equipment procurement; thus, potentially opening the door wider defence procurement, overall.

The brokerage firm has listed Solar Industries, PTC Industries, Dynamatic Technologies and Azad Engineering as key beneficiaries of ReArm Europe policy.

Key Developments In Defence Stocks:

Indian Defence Stock Gains in March 2025:

Zen Technologies (+20%)
Bharat Dynamics (+16%)
Data Patterns (+13%)
Mishra Dhatu Nigam (+13%)
Bharat Electronics and Hindustan Aeronautics (both +12%)

Despite recent gains, several stocks remain significantly below their 52-week highs:

Data Patterns (-55%)
Zen Technologies (-52%)
Cochin Shipyard (-55%)

EU's Defence Spending Plan

The "ReArm Europe" plan, spearheaded by European Commission President Ursula von der Leyen, aims to mobilize €800 billion over four years. This includes:

€650 billion from increased national defence budgets.
€150 billion through joint borrowing for loans to member states.

The funds will be allocated for air and missile defence systems, artillery, drones, cyber capabilities, and other military needs. The plan also suspends strict fiscal rules to allow higher defence spending without breaching deficit limits.

The European Union has announced a transformative defence initiative, dubbed the "ReArm Europe" plan, in response to shifting global security dynamics, including the U.S. suspension of military aid to Ukraine. This ambitious strategy aims to bolster European defence capabilities and ensure strategic autonomy while addressing urgent support for Ukraine.

Under the plan, EU member states are encouraged to increase defence spending by 1.5% of GDP, unlocking approximately €650 billion ($683 billion) over four years.

The EU Commission will implement a joint borrowing mechanism to raise €150 billion ($157 billion) through bonds, creating a total budget of nearly €800 billion ($850 billion). These funds will be directed toward critical areas such as air and missile defence systems, artillery, munitions, drones, cyber capabilities, and military mobility.

EU Commission President Ursula von der Leyen emphasised that Europe is entering an "era of rearmament," both to address immediate needs in Ukraine and to take greater responsibility for its long-term security. The plan mirrors the EU's COVID-19 recovery funding model but distributes loans rather than grants. It also includes fiscal flexibility under the Stability and Growth Pact to exempt increased defence spending from budgetary limits for four years.

India's Defence Exports Surge

India's defence exports have reached unprecedented levels, driven by the Modi government's focus on indigenisation and the 'Make in India' initiative. In FY24, exports surged to a record ₹21,083 crore, marking a 33% increase from ₹15,920 crore in FY23. This growth represents a 31-fold rise over the past decade, with India now ranking among the top 25 global defence exporters.

Key export destinations include the United States, France, and Armenia, while India supplies to over 90 countries globally. Exported items include advanced weaponry such as BrahMos missiles, Pinaka rocket systems, Akash air defence missiles, artillery guns, Dornier-228 aircraft, radars, armoured vehicles, bulletproof vests, night vision equipment, and electronics. Both private companies and Defence Public Sector Undertakings (DPSUs) contribute significantly—60% and 40%, respectively.

The government has set an ambitious target of ₹50,000 crore in defence exports by 2029. Policy reforms like streamlined licensing systems and enhanced export authorizations have facilitated this growth. Additionally, India's domestic defence production reached ₹1.27 trillion in FY24, further bolstering exports.

Should You Buy Defence Stocks?

The Indian defence sector is emerging as a promising investment opportunity, driven by both domestic and global factors. Here's an analysis of whether you should consider investing in defence stocks:

The geopolitical landscape, including unrest in Europe, the Middle East, and East Asia, has led to increased global military spending. European nations, in particular, are ramping up their defence budgets in response to shifting U.S. policies under Donald Trump, creating opportunities for Indian defence companies to secure international orders.
   
India plans to spend $130 billion on defence over the next five years, with a strong focus on localization and reducing reliance on imports. This includes major programs like QRSAM, LCA Mark 1A, and Pinaka systems, which are expected to drive growth in the sector.

Policies such as "Make in India" and relaxed FDI norms have bolstered indigenous production capabilities. The Defence Acquisition Council has approved significant capital acquisition proposals to modernize the armed forces.

Recent corrections in defence stock prices have brought valuations closer to historical averages, making them more appealing for long-term investors.

Market experts like Sunil Subramaniam advise caution in the short term due to momentum challenges. While the long-term growth story remains intact, immediate returns may be limited.

Key Investment Opportunities

Companies like Hindustan Aeronautics Ltd (HAL), Bharat Dynamics Ltd (BDL), and Data Patterns (India) are well-positioned due to their strong pipelines and strategic importance in India's defence ecosystem. The defence electronics segment is particularly promising, with companies like Bharat Electronics Limited (BEL) expected to benefit from upcoming large-scale programs3.

Defence stocks are a compelling long-term investment for those with a 3-5 year horizon, given their strategic importance and growth potential in India's infrastructure development. However, short-term investors should remain cautious due to ongoing market volatility.

This European initiative reflects Europe's heightened focus on defence following Russia's invasion of Ukraine in 2022, which exposed gaps in preparedness and production capacity. Defence spending across EU nations has already surged, with expenditures reaching record highs in recent years. However, experts warn that the plan requires careful implementation to avoid long-term debt dependency while ensuring effective investment in pan-European capabilities.

Amid reduced US military support to Ukraine and ongoing geopolitical uncertainties, Indian defence firms are well-positioned to capitalize on this trend through exports and collaborations.

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