Whalesbook
### Defence Sector Faces Sell-Off Amid Budget Disconnect
Indian defence stocks encountered considerable selling pressure on Budget Day, February 1, 2026, as the Nifty India Defence index registered a decline of over 4%. This market reaction materialized despite the Union Budget allocating ₹2.19 lakh crore for defence capital expenditure in FY27, an increase of approximately 18% from the revised FY26 estimate of ₹1.86 lakh crore. The downturn indicates that the absolute rise in allocation failed to meet the elevated growth expectations many market participants had built in ahead of the announcement. This disappointment, coupled with a significant risk-off sentiment across the broader market, led to a sharp correction in defence counters.
### Unmet Expectations and Broader Market Headwinds
Investor sentiment was significantly influenced by the projected pace of capital expenditure growth. Analysts, including those at Jefferies, had anticipated a more robust increase, with Jefferies previously suggesting a growth rate exceeding 25%. The substantial utilisation of the FY26 defence capex, with around 62% spent between April and November 2025, partly due to emergency procurements following Operation Sindoor in May 2025, had further fueled these high expectations. The 18% increase, while substantial in absolute terms, was perceived as falling short of the market's built-in forecasts.
Adding to the pressure was a market-wide sell-off triggered by a hike in the Securities Transaction Tax (STT) on futures and options (F&O) trading. The revised rates, effective April 1, 2026, increased STT on futures by 150% (to 0.05%) and on options by up to 50% (to 0.15% on exercise). This measure aimed at curbing speculative trading, led to a broad risk-off sentiment, dragging down multiple sectors including defence.
### Targeted Measures Offer Limited Near-Term Order Boost
Beyond the capital outlay, the Budget introduced several targeted measures. These included a basic customs duty exemption on raw materials imported for defence aviation maintenance, repair, and overhaul (MRO) activities by Public Sector Units (PSUs), and an income tax exemption for disability pensions for armed forces personnel. While these announcements aim to support the sector's long-term development and personnel welfare, they did not include the large, project-specific procurement decisions or fresh contract announcements that many defence stocks were anticipating for immediate order visibility.
### Stock Performance Snapshot
The Nifty India Defence index closed down 4.12% on Budget Day. Among individual stocks, Bharat Dynamics experienced the steepest fall, declining 8.82% to ₹1,401.95. Garden Reach Shipbuilders & Engineers dropped 7.13%, and Mazagon Dock Shipbuilders lost 6.07%. Other notable decliners included Paras Defence and Space Technologies (-5.59%), Mishra Dhatu Nigam (-5.33%), Cochin Shipyard (-5.23%), BEML (-4.75%), and Data Patterns (India) (-4.74%). Even large-cap entities like Bharat Electronics eased 4.08%, and Hindustan Aeronautics fell 3.80%. MTAR Technologies was a solitary exception, rising 2.94% to ₹3,019.
Companies like Bharat Dynamics, with a trailing P/E of approximately 97, and Hindustan Aeronautics, holding a P/E around 35, saw significant price corrections. Paras Defence and Space Technologies, trading at a P/E of roughly 72, also experienced a decline, as did Mishra Dhatu Nigam, with a P/E around 62. Bharat Electronics, which had a P/E of around 55, and MTAR Technologies, with a P/E exceeding 130, were also impacted by the broad sector weakness. The market capitalization for Bharat Electronics stood at approximately ₹3.28 lakh crore, while Bharat Dynamics' was around ₹56,368 crore as of January 31, 2026.