Israel-Iran war: Mazagon Dock, GRSE, Bharat Dynamics, other defence stocks rally. Do you own any of these?

Defence stocks in India witnessed a sharp rally on Tuesday as the ongoing conflict between Israel and Iran entered its fifth day, heightening geopolitical tensions. The Nifty India Defence Index climbed over 1.6% during the session, breaching the 9,000 mark.

Mazagon Dock Shipbuilders share price emerged as the top performer on the index, surging more than 5%. Garden Reach Shipbuilders & Engineers shares jumped over 4%, while Data Patterns (India) shares advanced more than 3%. Other major gainers included Bharat Dynamics, Cochin Shipyard, Solar Industries India, BEML, and Hindustan Aeronautics (HAL), which rose between 1% and 2%.

In contrast, Zen Technologies, Mishra Dhatu Nigam, and Astra Microwave Products shares traded marginally lower, bucking the broader trend.

The renewed investor interest in defence stocks was driven by expectations of increased defence spending and order inflows amid rising global security concerns. The escalation of the Israel-Iran conflict has intensified market anticipation of higher demand for defence equipment and services, analysts said.

Defence stocks had already gained traction last month following India’s targeted military strikes on terrorist outfits in Pakistan under Operation Sindoor. While tensions between India and Pakistan have since de-escalated, the prolonged Russia-Ukraine conflict continues to underpin bullish sentiment in the sector.

The latest developments in the Middle East have further strengthened the outlook for India’s defence stocks, with investors betting on sustained growth in defence orders and strategic investments.

The Defense sector’s market cap hit an all-time high in May 2025, recording a CAGR of 55% between FY19 and May 2025, with aggregate PAT reporting a 23% CAGR.

Defence companies performed well during the quarter ended March 2025 on the back of better execution amid push for defence indigenization. The EBITDA margins of defence companies improved significantly, driven by better project execution and enhanced operational efficiencies.

Defence Stocks Outlook

The sector continues to benefit from the Indian government's strong emphasis on indigenization, which has supported domestic manufacturers. Additionally, heightened geopolitical tensions during the quarter prompted emergency procurement measures by the government — an initiative expected to translate into incremental orders for defence companies in the near term.

“Defence stocks look promising due to the ongoing geopolitical tussle between Iran and Israel. Moreover, the Indian government is likely to enhance defence spending from the current ~2% of GDP to 3% – 4% over the next decade. Further, the government has targeted ₹25,000 crore in defence exports by 2025–26. Investors can focus on export-driven defence stocks with long-term potential,” said Sankhanath Bandyopadhyay, Economist at Infomerics Valuation and Ratings Ltd.

He advises investors to carefully assess the financials and outlook of such defence stocks before investing, and having a judicious mix so that a healthy dividend can also be earned.

However, analysts have flagged valuation concerns following the recent sharp rally in defence stocks.

“While defence stocks such as Garden Reach Shipbuilders & Engineers, Mazagon Dock Shipbuilders, HAL, BEL, and BDL remain attractive from a long-term perspective, current valuations appear stretched. The recent uptrend is largely driven by sentiment and prevailing geopolitical narratives,” said Avinash Gorakshakar, Head of Research at Profitmart Securities.

He advised investors to consider accumulating these stocks with a long-term horizon of at least two years.

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments believes that the defence stocks have good long-term prospects, and after the recent India-Pakistan conflict, the government is likely to increase the defence outlay, which will improve the prospects further.

“The concern, however, is in valuations. All the good news is already in the price. Another concern is that the expectation of high profits from the sector may not materialise since the government owns most companies in the sector and the government is the only buyer. This preempts very high profits which the market appears to be discounting. Those companies catering to exports are better placed,” said Vijayakumar.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.