Indian defence stocks: Amid slump, an opportunity under Trump 2.0

India’s defence majors such as Ideaforge Technology Ltd and Hindustan Aeronautics Ltd took a beating at the bourses during the recent market sell-off. But under US President Donald Trump’s watch, these stocks hold potential for a strong comeback.

India-US relations have steadily strengthened over the past two decades driven by growing defence cooperation and the US in 2016 designating India as a major defence partner.

During Trump’s first presidency, India was elevated to Strategic Trade Authorization tier 1 status in 2018, which allowed New Delhi license-free access to a wide range of US military and dual-use technologies.

Several key defence agreements, including the Communications Compatibility and Security Agreement, Basic Exchange and Cooperation Agreement, and Industrial Security Annex, were signed, strengthening defence technology collaboration between the two nations.

Under Trump 2.0, the near-term prospects could be a bit negative for Indian defence companies as the US is likely to push for higher defence exports, which would imply imports of completely built units and lesser scope for Indian companies to collaborate with US counterparts, said Deepak Krishnan, an analyst at Kotak Institutional Equities.

But “over the medium term, we believe that there is a potential for India-US defence ties to improve over next four years, which can potentially open up opportunities for Indian defence manufacturers to collaborate with leading US defence companies", Krishnan said.

The US-India Joint Leaders’ statement released in February highlighted several key developments for India’s defence sector, including plans for a 10-year defence partnership framework this year, co-production with India, and a so-called Autonomous Systems Industry Alliance to boost industry collaboration.

“Such initiatives would not only bring fresh defence contracts for Indian manufacturers but also foster technology exchanges that could enhance the capabilities of the Indian defence industry," said Divyam Mour, research analyst, SAMCO Securities.

Additionally, a potential reciprocal defence procurement agreement could simplify the exchange of defence goods and services, making trade smoother and more efficient for Indian manufacturers, he said.

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Beware defence valuations

In terms of overall trade between India and the US, New Delhi is pushing to strike a bilateral trade agreement with Washington as the 2 April deadline for Trump’s reciprocal tariff plan approaches. A US delegation led by assistant US trade representative Brendan Lynch is to arrive in New Delhi on Tuesday for bilateral trade discussions.

Trump’s aggressive global trade war, among other factors, dragged India’s stock markets into bear territory until last week. Defence stocks such as HAL, Ideaforge, Data Patterns India, Garden Reach Shipbuilders, Cochin Shipyard, MTAR Technologies, Paras Defence, and Zen Technologies tumbled 27-55% from their 52-week highs.

The Nifty India Defence PR index has declined nearly 22% from its 52-week high, steeper than the Nifty 50’s 10% drop.

But with the revival of the US-India trade discussions, India could not just gain access to advanced defence technology but also score tariff benefits, said Ashwini Shami, executive vice president and portfolio manager at OmniScience Capital. The bilateral trade agreement being discussed could include reciprocal defence procurement that would allow India to export to the US, he added.

“Margins and orders? Not really a worry for them," said Shami, explaining that Indian defence companies have a 4-10 year order backlog with predefined margins.

He, however, added that while the valuations of Indian defence companies had undergone a significant correction, investors should remain cautious as several stocks were still overvalued. “A bottom-up approach is essential to identifying fairly priced opportunities within this high-growth defence sector," Shami said.

Krishnan of Kotak Institutional Equities echoed similar concerns.

“While we remain positive on the long-term growth story (for India’s defence sector), we believe that despite the steep correction over the last few months, current valuation still looks expensive," he said, "and we continue to remain cautious on the sector with potential downward revision to margins being the key risk for Indian defence stocks".

Stocks like Bharat Electronics and Mazagon Dock Shipbuilders are down only 12% and 10% from their 52-week highs, suggesting that some valuations may still be on the higher side.

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India’s military ambitions

Adding to the domestic defence sector’s momentum, India’s Defence Acquisition Council has greenlit capital acquisitions worth ₹54,000 crore to strengthen the Indian Army—a move that is not only expected to accelerate growth but also unlock fresh opportunities in the sector.

The defence sector continues to present a strong growth opportunity, driven by the government’s push for self-reliance and its vision to establish India as a key defence exporter, said Mour of SAMCO Securities. “India’s goal to become an annual exporter of ₹50,000 crore by 2029, with nearly half of that figure already achieved in 2023-24, signals significant growth potential."

However, there is uncertainty on how the trade talks will unfold for India’s defence sector—whether in terms of securing more orders, establishing manufacturing units, or potential tariff changes, said Hitesh Jain, strategist, institutional equities research, YES Securities.

But he also pointed out that apart from the US, Europe and several African and Eastern European nations were also accelerating their defence manufacturing efforts, which could benefit Indian defence companies.

Earlier this month, the executive arm of the European Union, the European Commission, proposed plans that could channel about €800 billion ($867 billion) into fresh defence investments. The ReArm Europe plan announced earlier this month includes €150 billion in loans for member states to boost defence and security.

Jain projects the Indian defence sector’s sales growth to remain largely stable in 2025-26, but sees profit after tax accelerating at 20% in FY26, up from 16% in FY25.

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