India's Defense Sector: A Geopolitical Catalyst Amid Valuation Crossroads – Why the Rally Isn’t Over Yet

The Indian defense sector has emerged as one of the most compelling investment narratives in 2025, fueled by geopolitical tensions, structural reforms, and the validation of "Make in India" through Operation SINDOOR. While near-term valuations – such as the Nifty Defence index trading at a 61x P/E – raise concerns, the sector’s long-term growth trajectory, underpinned by global demand for affordable combat-proven tech, justifies an overweight stance. Here’s why investors should look past short-term volatility and focus on the $50 billion export target by 2029.

The Operation SINDOOR Catalyst: From R&D to Real-World Validation

Operation SINDOOR, a landmark military operation in May 2025, did more than showcase India’s combat readiness – it validated its defense technology ecosystem. Systems like the Akash air defense missile, BrahMos cruise missile, and D-4 anti-drone system proved their mettle in live-fire scenarios, neutralizing Pakistan’s drone swarms and missile attacks. This credibility has turbocharged export demand:
- BrahMos exports to the Philippines (a $375 million deal) are being expanded, while Indonesia and Middle Eastern nations are now in advanced negotiations.
- Akash systems secured a $6 billion order from Armenia, with Brazil and Egypt expressing interest.
- The drone sector – critical to SINDOOR’s success – is projected to hit $11 billion by 2030, driven by indigenous players like Alpha Design Technologies and IG Drones.

The operation’s success has also exposed flaws in Chinese military hardware used by Pakistan, indirectly boosting India’s global market share.

Order Pipeline Visibility: Naval Projects and Export Leverage

The sector’s order pipeline is robust, with multi-year visibility:
1. Naval Modernization:
- GRSE (Garden Reach Shipbuilders & Engineers) is executing a $1.2 billion project to deliver six Scorpène-class submarines to Indonesia.
- Mazagon Dock Shipbuilders (MDL) is building six P17A stealth frigates (valued at $10 billion) and has export options with Vietnam and the UAE.
- shows a 400% jump, underpinned by international contracts.

1. Export-Driven Growth:
2. The Production Linked Incentive (PLI) scheme for drones and missiles has unlocked ₹120 crore in subsidies, accelerating export readiness.
3. The Drone Federation of India, representing 550+ firms, aims to capture 12% of the global drone market by 2030, with ideaForge’s SWITCH UAV and Alpha Design’s SkyStriker leading the charge.

Valuation Concerns vs. Secular Growth: A Balancing Act

Critics argue that the sector is overbought, citing the Nifty Defence index’s 61x P/E, which exceeds its 5-year average of 35x. However, three factors justify current multiples:
1. Structural Defense Spending: India’s defense budget has grown at 7-9% CAGR since 2020, with 80% of spending now allocated to procurement (vs. maintenance).
2. Global Arms Market Shift: The $1.1 trillion global defense market is shifting toward cost-effective, combat-proven systems, which India now offers. Its 8.3% global arms import share is set to shrink as exports rise.
3. PSU Reforms: Government initiatives like SRIJAN and iDEX are unlocking ₹100 crore grants for startups, while employee stock option schemes at PSUs like GRSE and MDL align management incentives with shareholder returns.

Stock-Specific Picks: GRSE and MDL – The PSU Powerhouses

For investors seeking leverage to both domestic modernization and exports, these two state-owned enterprises (PSUs) stand out:

1. Garden Reach Shipbuilders & Engineers (GRSE):
2. Catalyst: The Indonesia submarine deal and potential orders from the EU’s defense pool.
3. Valuation: Trading at 25x FY2025E P/E, GRSE offers a 15% upside to its 3-year average.

4. reflects cost discipline and higher-margin exports.

5. Mazagon Dock Shipbuilders (MDL):

6. Catalyst: Execution of P17A frigates and a $5 billion MoU with France for submarine tech transfer.
7. Valuation: At 20x FY2025E P/E, MDL’s ROE is set to hit 18% by 2026 from 12% in 2024, driven by scale in naval projects.

The Bottom Line: Geopolitics and Reform Outweigh Near-Term Risks

While profit-taking could pressure valuations in the short term, the secular growth tailwinds – from rising defense budgets, export wins, and PSU reforms – are too strong to ignore. The sector’s $50 billion export target by 2029 is achievable, given its combat-proven tech and geopolitical leverage.

Action Plan:
- Overweight the sector with a 6-12 month horizon, focusing on GRSE and MDL for their export exposure and order visibility.
- Monitor geopolitical triggers: Any escalation in Pakistan or China could amplify demand for India’s defense systems.

In a world where defense spending is a non-negotiable, India’s leap in indigenous innovation has created a rare opportunity: a high-growth, geopolitical-protected sector with structural tailwinds. The rally isn’t over – it’s just getting started.

Invest wisely, but invest decisively.