Defence-linked stocks are likely to remain in focus during the Union Budget 2026 on Feb. 1, as investors factor in a moderate increase in defence outlay and continued emphasis on indigenisation. While the market is not expecting major surprises on headline allocations, attention is firmly on execution momentum, faster order finalisation and clarity on procurement timelines.
Among defence PSUs, companies with strong order books and execution visibility are expected to stay in the spotlight. Hindustan Aeronautics is seen benefiting from its aircraft and engine manufacturing pipeline, while Bharat Electronics remains a key play on defence electronics, radar and communication systems. Bharat Dynamics is also on investors’ radar given its role in missile manufacturing, while shipbuilders such as Mazagon Dock Shipbuilders and Garden Reach Shipbuilders are being tracked amid ongoing naval modernisation.
Private sector defence manufacturers are also expected to attract interest as the indigenisation push gathers pace. Larsen & Toubro remains a key beneficiary of large platform and systems integration projects, while Bharat Forge, Data Patterns and Astra Microwave are seen gaining from increased localisation of components, electronics and subsystems.
Market participants expect the defence budget to rise 8-10% year-on-year, broadly in line with recent trends. Analysts note that while higher allocations offer medium-term comfort, stock performance will hinge more on the pace of contract awards, execution progress and timely payments rather than headline numbers alone. Capital expenditure and domestic sourcing are expected to remain priorities.
Brokerages say that with much of the optimism already priced in, the Budget’s impact on defence stocks is likely to be stock-specific rather than sector-wide. Investors are expected to remain selective, favouring companies with clear execution timelines, strong cash flows and long-term earnings visibility, while watching the Budget for cues on policy continuity and the government’s commitment to defence manufacturing.
