The signing of the free trade agreement (FTA) between India and the EU, which, among other things, offers Indian defence companies new opportunities to work together on co-development and co-production with their EU counterparts, appears to have brought much-needed optimism to Dalal Street, as there was broad-based, aggressive buying in the defence sector, with a few of the stocks rising over 10 per cent, even as the benchmark indices Sensex and Nifty closed higher.
The Security and Defence Partnership (SDP) between India and the EU is expected to deepen defence cooperation and bring interoperability, offering Indian defence firms an opportunity to be part of the SAFE (Security Action for Europe) programme of Europe.
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The defence index was up around 5 per cent during the trading day.
From the 30 Sensex firms, Bharat Electronics surged over 9 per cent, also buoyed by its December quarter earnings.
Other major gainers in the defence index included Avantel and Data Patterns, which rose over 13 per cent; Solar Industries, MTAR Technologies Ltd and Paras Defence, which rose over 7 per cent; and BDL, Hindustan Aeronautics, DCX, and ideaForge, which gained over 6 per cent at the close of the market day.
Shipping stocks also witnessed high volumes as the FTA is expected to help the two sides work more closely on counter-terrorism, maritime security, and cybersecurity. "This will also strengthen our shared commitment to a rules-based international order. Our cooperation in the Indo-Pacific region will grow," a statement from the government said.
Mazagon Dock Shipbuilders led the rally in the shipping sector, rising over 7 per cent, followed by Cochin Shipyard and Garden Reach Shipbuilders & Engineers.
Expectations from Union Budget
The rally in defence stocks also comes ahead of the Union Budget, scheduled for February 1. There is a high expectation from major players in the sector and investors that there will be a substantial increase in capital expenditure for the sector.
According to Emkay Global, "The government is expected to launch the Drone Shakti Mission, featuring a 5-year, Rs 10,000 crore incentive programme to position India as a global manufacturing hub."
Nomura India expects a single-digit to nearly 20 per cent increase in the allocation for the defence sector, with increased focus on domestic procurement and modernisation.
