Indian mutual funds actively rebalanced their defence sector portfolios in March 2026, a period marked by heightened US-Iran geopolitical tensions. Despite the Nifty falling 11.3 percent that month, equity-oriented mutual funds recorded substantial net inflows totaling Rs 40,500 crore, indicating a strategic reallocation of investments within specific sectors.
Significant Buying in Key Defence Stocks
Hindustan Aeronautics Ltd (HAL) was a major beneficiary, attracting net mutual fund purchases worth Rs 272 crore. This activity increased mutual funds' stake in HAL from 5.73 percent in February to 5.84 percent by the end of March. Zen Technologies also saw considerable interest, with MFs buying Rs 155 crore worth of shares, raising their stake from 5.83 percent to 6.77 percent.
Other defence companies experiencing inflows included Data Patterns (India) Ltd, with net buying of Rs 101 crore, and Bharat Dynamics Ltd (BDL), which saw Rs 64 crore in MF purchases, bringing their total stake to 9.21 percent by March end.
Major Selling Activity
Conversely, Bharat Electronics Ltd (BEL) faced significant selling pressure, with mutual funds offloading a net Rs 515 crore worth of shares. This reduced the institutional class's stake in BEL from 14.44 percent in February to 14.28 percent in March. Cochin Shipyard Ltd also witnessed selling, with Rs 67 crore in outflows, shrinking MF stake from 2.25 percent to 2.06 percent year-over-year. MTAR Technologies experienced Rs 45 crore in mutual fund selling.
Several other defence and related technology stocks, including Mazagon Dock Shipbuilders Ltd, Garden Reach Shipbuilders and Engineers (GRSE), IdeaForge Technology, DCX Systems Ltd, and Solar Industries, saw negligible mutual fund interest during the month.
Analyst Outlook on the Defence Sector
Looking ahead, analysts offer varied perspectives on the Indian defence sector's trajectory. Thomas V Abraham, a Research Analyst at Mirae Asset Sharekhan, highlighted the positive impact of the 'Atmanirbhar Bharat' initiative, projecting defence export targets of Rs 50,000 crore by FY29. He anticipates this will particularly benefit firms like HAL and BEL.
A note from Nuvama on April 10 suggested that India is entering a more 'calibrated' phase of the defence upcycle. While robust order visibility supports the sector, the pace of incremental large-ticket ordering is expected to moderate. Nuvama expressed a preference for defence electronics and subsystem players like BEL, Data Patterns (India) Ltd, and consumable-linked plays (SOIL). This preference stems from their faster execution cycles, lower import dependence, and superior margin profiles compared to integrators such as HAL and BDL, where execution and ordering tempo might be more variable.
PL Capital's Q4 preview note indicated that defence companies were likely to report a modest revenue growth of 2 percent year-over-year in the March quarter, attributing this to ongoing supply chain disruptions amidst geopolitical tensions. The firm also projected a contraction in EBITDA margins due to an unfavorable mix. For Q4FY26, BEL announced orders worth Rs 12,550 crore, and HAL secured orders totaling Rs 7,010 crore, including significant contracts for Dhruv, Dornier, and ALH Mk-III aircraft.
“Continued policy thrust on defense indigenization should further support sustained order booking momentum across multiple platforms and programs like ALH, AMCA and QRSAM,” PL Capital stated, noting that the Acceptance of Necessity (AoN) approved by the Defence Acquisition Council (DAC) for FY26 stood at Rs 9.8 lakh crore, with March 2026 AoN of Rs 2.4 lakh crore expected to translate into incremental orders for key beneficiaries like BEL and HAL.