The Nifty Defence index and several related stocks have recently experienced significant rallies, driven by a confluence of factors including strong quarterly earnings, positive government initiatives, and increasing investor confidence in the Indian defense sector. Stocks such as Garden Reach Shipbuilders & Engineers (GRSE) and Cochin Shipyard have been particularly noteworthy, demonstrating substantial gains.

GRSE's Impressive Performance

Garden Reach Shipbuilders & Engineers (GRSE) has seen its shares surge, with a gain of over 14% on May 14th, following the release of stellar Q4 results. The company's net profit more than doubled year-on-year (YoY) to ₹244.2 crore, compared to ₹111.6 crore in the same quarter last year. This impressive growth was underpinned by a 61.7% YoY increase in revenue from operations, reaching ₹1,642 crore. The company's EBITDA also saw a significant jump of 141.8% YoY, with margins expanding to 13.3% from 8.9% the previous year. As a result of this strong performance, the board has recommended a final dividend of ₹4.90 per equity share for FY25, pending shareholder approval.

Cmde Hari PR (Retd), Chairman and Managing Director of GRSE, expressed optimism about the company's future, citing a strong order book and order visibility, including in the commercial shipbuilding segment. Despite the recent rally, the stock remains approximately 23% below its all-time high from July 2024, indicating further potential upside. Over the past year, GRSE has delivered multibagger returns, gaining 111%. The stock has been on a strong upward trajectory, with gains of 13.5% in May, 14% in April, and an impressive 34% in March.

Cochin Shipyard's Gains

Cochin Shipyard has also experienced positive momentum. On May 14, 2025, the stock gained 5.38%. The company's shares have shown consistent upward movement over the past four days and are trading above key moving averages. Cochin Shipyard shares also rallied 4% on May 13 after the company announced a collaboration with Drydocks World to strengthen India's ship repair and offshore manufacturing capabilities. This partnership builds upon a Memorandum of Understanding (MoU) signed last month. The two parties intend to begin joint work at the ISRF in Kochi. Furthermore, the company's board will meet on May 15, 2025, to consider the audited financial results for the quarter and year ended March 31, 2025, and to recommend a final dividend for FY25.

Nifty Defence Index Performance

The Nifty India Defence Index, which tracks the performance of defense sector companies listed on the National Stock Exchange (NSE), has shown strong performance over the past year, delivering a significant return of 32.79%. The 1-month and 3-month returns of 11.98% and 17.56%, respectively, also indicate robust positive momentum in the relatively shorter term. However, the index has seen some profit booking in the immediate past, with a 1-week return of -3.44%. As of today, the current value of Nifty India Defence stands at 7432.4. The returns generated by Nifty India Defence are as follows: 1 day returns: 4.12. 1 week returns: 6.02. 1 month returns: 18.56. 3 months returns: 31.72. 6 months returns: 24.3. 1 year returns: 44.04.

Factors Driving the Rally

Several factors have contributed to the rally in defense stocks and the Nifty Defence index:

• Government Initiatives: The Indian government's push for defense self-reliance under the Atmanirbhar Bharat initiative has been a key driver. Domestic production reached Rs 1.27 lakh crore in FY24, a 174% jump from 2014–15, driven largely by policy reforms and strategic initiatives.
• Increased Defence Exports: Defence exports have surged to a record Rs 23,622 crore (approximately US$2.76 billion) in FY25, a 12% increase over FY24 and a nearly 30-fold rise over the past decade. India now exports military equipment to over 100 countries, with a long-term goal of reaching Rs 50,000 crore in annual exports by 2029.
• Strong Order Pipeline: The Defence Acquisition Council has approved Rs 8.45 lakh crore worth of orders between FY22 and FY25, 3.3 times the amount cleared in the prior three years. Significant contracts totaling Rs 2.35 lakh crore are lined up for FY26 and FY27.
• "Make in India" Push: Prime Minister Narendra Modi has called for greater military self-reliance, emphasizing the need for indigenous technology and "Made in India" defense equipment.

Analyst Views

Antique Broking has reiterated 'buy' ratings on Mazagon Dock and GRSE, while maintaining a 'hold' on Cochin Shipyard, citing limited clarity on the timeline and scale of the proposed second indigenous aircraft carrier (IAC-II). The brokerage expects the stocks to trade up to 45 times FY27 core earnings, supported by a strong policy framework, rising indigenization, and a robust defence capex pipeline.

Potential Headwinds

Despite the positive outlook, some analysts have cautioned about potential headwinds. For GRSE, concerns have been raised about how much of the positive news is already priced into the stock, which trades at over 40x trailing earnings. Increased depreciation costs and inventory dynamics are potential challenges for Cochin Shipyard.

Overall, the Indian defense sector is experiencing a period of growth and optimism, driven by government support, strong earnings, and increasing investor confidence. While some stocks may be trading at high valuations, the long-term outlook for the sector remains positive.