Less ammo deflates charged-up Defence stocks

After the stupendous rally in 2022-23, defence stocks ran out of favour in 2024. With several of the frontline defence stocks such as Hindustan Aeronautics Ltd, Mazagon Dock Shipbuilders, Bharat Electronics, Garden Reach Shipping and Engineers falling by up to 50  per cent from their peak levels, a lot of hope was pinned to the Budget, by way of higher outlay and increased indigenous sourcing.

However, the budget provision of ₹1.80 lakh crore for capital expenditure for the defence sector did not go well with investors. As a result, most defence stocks which rallied at the start of the Budget speech shed all the gains and ended the day in red. Mazagon Dock Shipbuilders topped the losers’ list shedding almost 5 per cent in trade on Saturday, followed by Cochin Shipyard (-4.3 per cent), HAL (-4.2 per cent) and Bharat Electronics (-3.7 per cent). But Garden Reach Shipbuilders and Engineers managed to restrict the fall at 1.95 per cent.

Less allocation

But why did these stocks misfire?

On the face of it, the overall capital outlay of ₹1.80 lakh crore, is only 4.7 per cent higher than the budgetary allocation of ₹1.72 lakh crore last year.  However, the current year’s allocation is 13 per cent higher than the revised estimate for FY25 of ₹1.59 lakh crore.

Why did the FY25 revised capital expenditure fall short? Well, the Defence ministry did not spend as much as was provided on equipment (₹46,589 crore of revised estimate versus Budget provision of ₹62,198) and Construction work (₹10,561 crore of revised estimate capital outlay versus budget provision of ₹12,016 crore) which were the major spend areas.

Similarly, while the ministry spent more on Naval fleet at ₹25,605 crore, which is nearly 8 per cent higher than budgeted estimate of ₹23,800 crore, the spend on Naval Dockyard projects fell short by 21 per cent at ₹5,418 crore. 

Another significant area wherein the revised capital outlay fell short of the budgeted outlay for FY25 is the technology development spend for both Army and Airforce. As against ₹1,797 crore provided in the budget last year, the revised capital spend stood at ₹407 crore. However, for the FY26, the allocation has been stepped up further to ₹2,037 crore.

 That said, the allocation compared to the revised estimate is higher on an overall basis, but for a few exceptions such as Naval fleet and dockyard projects which are lower by 5 per cent and 15 per cent respectively.

From a business perspective, this should not be a big cause of worry for two reasons. One, many of them are looking at opportunities outside of India and are hoping to make it big in the export market. Two, the services budget allocation is only the starting point and the Government typically has some buffer across segments and can always reallocate capital on a need basis. However, today’s reaction highlight sensitivities of the stocks when they are highly valued and the news does not meet expectations.