Renewed geopolitical tensions stemming from the ongoing conflict between Israel and Iran have triggered a rebound in defence stocks, reflecting investor sentiment towards the sector's potential for growth amidst uncertainty. Bharat Dynamics Limited (BDL), Mazagon Dock Shipbuilders, and Paras Defence and Space Technologies have all experienced notable gains, rising up to 4% as of today, June 19, 2025.

Factors Driving the Rebound

Several factors contribute to this resurgence in defence stocks.

• Geopolitical Instability: The primary driver is the escalating tensions between Israel and Iran. Historically, geopolitical instability often leads to increased investment in defence as nations bolster their military capabilities. Investors anticipate higher demand for defence equipment, systems, and technologies, thus driving up stock prices for companies in this sector. The US military is also bolstering its presence in the region, stirring speculation about US intervention.

• Government Initiatives: The Indian government's continued focus on "Atmanirbhar Bharat" (self-reliant India) in defence production provides strong tailwinds for domestic defence companies. Increased indigenization, strategic preparedness, and global market integration are significantly contributing to the sector's growth.

• Strong Order Books: Many Indian defence companies have robust order books, providing revenue visibility for the next few years. This instills confidence among investors, leading to increased buying activity in defence stocks.

Performance of Key Defence Stocks

• Bharat Dynamics Limited (BDL): BDL, a leading defence public sector undertaking, has been in focus following its FY25 results and final dividend recommendation. On May 27, 2025, BDL's share price closed up by 2.64%, reaching a 52-week high of ₹1,991.50. Nuvama Institutional Equities has upped its target price on BDL by 36 per cent after the company reported doubling of Q4 sales. BDL is well-positioned to achieve a revenue growth of over 60 per cent compounded annually over FY25–27. The Board of Directors has recommended a final dividend of ₹0.65 per equity share for the financial year ended March 31, 2025. For FY25, total income surged to ₹3,69,545.33 lakh.

• Mazagon Dock Shipbuilders: Despite negative market sentiment driven by geopolitical concerns, Mazagon Dock Shipbuilders' stock is on the rise. Media reports suggest a medium probability of its inclusion in the MSCI India Standard Index during the upcoming rebalancing on August 7, 2025, potentially attracting passive fund inflows. Mazagon Dock is trading at ₹3270.80. Nirmal Bang has retained its 'Buy' call and upped its valuation multiple for the stock by 71 per cent to arrive at a target of Rs 4,350 apiece, suggesting a potential 25 per cent upside for the stock ahead. The company's revenue grew in March quarter by 2.28% year-on-year.

• Paras Defence and Space Technologies: Paras Defence has been a standout performer in the defence sector rally. The company announced its first-ever stock split on April 30, 2025, in a 1:2 ratio, with the record date set for July 4, 2025. This move is aimed at improving liquidity and making the stock more affordable to investors. As of May 16 2025, the Paras Defence share price touched a new all-time high of ₹1,816.80 on the BSE, marking a 20% surge in a single trading session. The stock has delivered an impressive 74.10% return over the last four weeks. The company specializes in designing, developing, and manufacturing advanced defence and space engineering solutions, catering to a range of strategic verticals. Paras Defence has entered into a key partnership with Controp and MicroCon Vision to supply advanced drone camera technology in India.

Potential Risks and Considerations

While the outlook for defence stocks appears positive, several risks and considerations warrant attention:

• Geopolitical De-escalation: A potential de-escalation of the Israel-Iran conflict could lead to a sell-off in defence stocks, as investor concerns subside.

• Execution Challenges: Defence companies need to demonstrate timely execution of orders to sustain revenue growth and investor confidence. Delays in project execution or supply chain disruptions could negatively impact stock performance.

• Valuation Concerns: Some analysts believe that certain defence stocks may be trading at high valuations, leaving little room for error.

Conclusion

The defence sector is currently experiencing a boost due to geopolitical tensions and supportive government policies. BDL, Mazagon Dock, and Paras Defence are among the companies benefiting from this trend. However, investors should carefully consider the potential risks and challenges before making investment decisions, as the sector remains sensitive to geopolitical developments and execution-related factors.