Middle East on edge: Israel-Iran tensions ignite rally in Indian defence stocks

Defence stocks in India extended their rally on Tuesday, driven by heightened geopolitical tensions in the Middle East and expectations of higher defence spending. The Nifty India Defence Index jumped 1.63% during the session on the NSE, crossing the 9,000 mark for the first time.

At the time of writing, the index was trading at 8,894.65, up 0.34% from the previous close, even as declines outpaced advances among its constituents. The index has now risen for three straight sessions, gaining 3% over the last three days, and is up 36% year to date and 49% over the past year.

The conflict between Israel and Iran, now in its fifth day, has intensified global security concerns and reignited investor interest in defence stocks. Shares of Mazagon Dock Shipbuilders led the gains, surging nearly 6% to an intraday high of ₹3,343.5. As of 13:31, the shares were trading at ₹3,266.80, up 3.20% from its previous close of ₹3,165.30.

Garden Reach Shipbuilders & Engineers rose over 4.4% to hit ₹3,204.40, while Data Patterns (India) gained more than 3%.

Other notable gainers included Bharat Dynamics, Cochin Shipyard, Solar Industries India, BEML, and Hindustan Aeronautics (HAL), which rose between 1% and 2%. On the other hand, Zen Technologies, Mishra Dhatu Nigam, and Astra Microwave Products edged lower.

The rally builds on momentum from last month, when India conducted targeted strikes on terror outfits in Pakistan under Operation Sindoor. While tensions on that front have cooled, continued instability in Ukraine and now the Middle East is fuelling bullish sentiment for the sector.

India’s defence sector has shown strong financial performance, with the market cap touching an all-time high in May 2025 and a CAGR of 55% from FY19 to date. Aggregate PAT grew at a CAGR of 23% during the same period. March quarter results were buoyed by better execution and improved margins amid a strong push for indigenisation.

“Defence stocks look promising due to the ongoing geopolitical tussle between Iran and Israel. Moreover, the Indian government is likely to enhance defence spending from the current ~2% of GDP to 3–4% over the next decade. Further, the government has targeted ₹25,000 crore in defence exports by 2025–26. Investors can focus on export-driven defence stocks with long-term potential. In the current scenario, geopolitical tensions will likely be lingering between different countries, especially as being reflected in rising tensions in the Middle East,” opined Sankhanath Bandyopadhyay, Economist at Infomerics Valuation and Ratings Ltd. in a research note.

Analysts, however, are also urging caution. While long-term fundamentals remain intact, valuations are seen as stretched after the recent run-up. Investors are advised to take a selective, long-term approach as the sector enters a phase of consolidation.

“Investors should carefully assess the financials and outlook of such stocks before investing, and there should be judicious mix so that a healthy dividend can also be earned,” Bandyopadhyay added.