Defence sector rally may persist. But not for the reasons you expect

Is the party over for defence stocks? There are signs that suggest this. The one-way rally of these shares recently came to a stuttering halt, with stocks like Mazagon Dock, Garden Reach Shipbuilders and Paras Defence correcting almost 20 to 30 per cent from their July highs. Then, there is the HDFC Defence Fund, India's first defence-only fund, pulling brakes on accepting fresh investments amid growing concerns of overheated valuations. The major culprit, though, is the slowdown in India's defence expenditure that has always been the backbone of the sector's gains. The FY25 budget allocation to defence rose by a small 4.7 per cent. To put this in context, it had jumped 13 per cent in 2023. Clearly, the fact that India's defence spending is probably hitting the wall has cooled off market enthusiasm.