BEL, HAL to BDL: Defence stocks surge up to 9%. Is the US-Iran conflict driving this rally?

Defence stocks: Across-the-board buying in defence stocks drove the Nifty India Defence index nearly 2% higher in early-morning trade on Friday, February 20, amid escalating US-Iran tensions.

The defence gauge jumped 2.11% to hit the day's peak of 8,205 on the National Stock Exchange (NSE). While the index has risen 51% in a year, it remains 11% below its all-time high of 9195.

Defence stocks surge up to 9%

All constituents in the defence gauge traded in the green, with Data Patterns emerging as the best performer, surging 9% to ₹3,190.

Shares of Paras Defence, MTAR Technologies and Garden Reach Shipbuilders, along with Bharat Dynamics, rose around 4% each. Hindustan Aeronautics (HAL) and Bharat Electronics shares gained 2% each.

BEML, Midhani, Mazagon Dock, and Cochin Shipyard also traded higher as all defence stocks gained traction.

Why are defence stocks rising today?

At a time when escalating tensions between the US and Iran have spooked world markets and boosted oil prices, defence stocks are seeing buying. According to several media reports, military activity has stepped up in the Middle East.

US President Donald Trump warned Iran on Thursday that it must reach a deal over its nuclear program or "bad things" will happen, and appeared to set a 10-day deadline before the US might take action.

The US has deployed aircraft carriers, warships and jets to the region, according to a Reuters report. Meanwhile, according to the US Federal Administration website, Iran issued a notice to airmen that it planned rocket launches in areas across the south of the country.

With prediction markets showing a 57% chance of a US strike by March and U.S. warships deploying to the Middle East, investors are rotating into defense as a strategic hedge, said Vinit Bolinjkar, Head of Research at Ventura, highlighting the US-Iran conflict as key driver for today's defence stocks rise.

Harshal Dasani, Business Head at INVasset PMS, said that heightened geopolitical uncertainty typically triggers a reassessment of global security risks, and markets tend to price in the possibility of higher defence spending, faster order flows, and strategic stockpiling.

Defence stocks often act as a tactical hedge during such periods because visibility of government spending remains relatively insulated from economic cycles, he said, but cautioned that while geopolitics is the immediate trigger, the sustainability of this rally will depend on order inflows, execution momentum, and policy continuity in domestic defence capex.

Post-Budget rebound

The sector is also recovering from a sharp rebound seen at the start of February as investors originally "sold the news" when hen the Union Budget's ₹2.19 lakh crore capital outlay was seen as evolutionary rather than revolutionary, said Bolinkjar.

After a three-week correction, valuations for giants like HAL and BEL became attractive again. The market is now refocused on the solid 21% year-on-year growth in modernisation spending rather than the lack of "big bang" announcements, he added.

Valuations for broader public sector enterprises remain attractive, with the CPSE index trading at a P/E of 14 compared to 52 for the pure defence index, even after factoring in the latter’s relatively stronger growth outlook, said Ashwini Shami, President and Chief Portfolio Manager, OmniScience Capital

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