Defence stocks' valuations reflect exuberance

The figure includes both revenue expenditure — such as salaries & wages and operational costs — and capital allocation, which covers procurement of new equipment and other capital expenditure.

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Revenue expenditure has typically dominated defence outlays, accounting for 65 per cent in FY25 and averaging 62.4 per cent since FY21. Over the past five years, India's overall defence budget and defence capex have increased at a compound annual growth rate of 7.6 per cent.

Companies in the defence sector tend to benefit more from higher capital allocations. For FY26, capital allocation is budgeted to increase 12.9 per cent to ₹1.8 trillion from ₹1.6 trillion in the FY25 revised estimate. However, actual capex in FY25 rose just 3.4 per cent over FY24; it was 7.3 per cent below the Budget estimate.