Motilal Oswal Sees 38% Upside in Defence Stocks Amid Middle East Tensions

Defence Stocks Gain Amid Middle East Conflict

The Nifty India Defence Index surged almost 5% last week, driven by the ongoing Middle East conflict. The conflict, now in its second week, has resulted in the loss of lives and a significant increase in energy prices, including oil, natural gas, and gasoil.

Defence Sector Outlook According to Motilal Oswal Financial Services (MOSL), the current conflict is likely to drive higher global defence spending, with nations prioritizing security and military preparedness. This environment is well-positioned for India's defence sector to benefit from both rising domestic procurement and increasing export opportunities, supported by the government's push for indigenisation and a growing reputation in global arms markets.

In FY25, the Middle East accounted for 26% of total global arms imports, which can further increase, opening up opportunities for domestic defence companies to capture this market. The earlier NATO directive to member nations to increase defence capex allocation and higher budgetary allocation for defence by the Indian government bodes well for increasing the TAM (Total Addressable Market) for domestic defence companies.

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The Union Budget has increased the capital outlay on defence by 18% YoY to ₹2.2 trillion in FY27BE. This increase provides the necessary funding visibility to support the large pipeline of AoN (Acceptance of Necessity) approvals cleared YTD in FY26.

Defence Stocks to Buy Despite India's reliance on Israel for critical defence components, Motilal Oswal reiterated its bullish stance on defence stocks like:

• Bharat Electronics (BEL), with secured YTD capital contracts worth ₹20600 crore
• Hindustan Aeronautics (HAL), with secured YTD capital contracts worth ₹69400 crore and an estimated upside of 38% to ₹5500
• Bharat Dynamics (BDL), with secured YTD capital contracts worth ₹5400 crore and an estimated upside of 35% to ₹1800
• Astra Microwave, with steady inflows for the defence segment and an estimated upside of 14%
• BEL, with an estimated upside of 14%