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What’s fuelling this strange correlation?
The numbers are hard to ignore. Defence stocks added Rs 1.8 lakh crore in market cap after India’s successful military operation against Pakistan. Rail stocks weren’t far behind with Rs 90,000 crore in gains. IRCON and RVNL jumped more than 30% between May 9 and 19 before profit booking took over on Tuesday. RailTel, Texmaco Rail, Jupiter Wagons, IRFC and BEML were all swept up in the rally. The same pattern had played out during the 2024 bull market — and it’s back, without much in the way of new triggers.
Market veterans are raising eyebrows.
Vipul Bhowar, Head of Equities at Waterfield Advisors, believes the recent jump in railway stocks is less about fundamentals and more about investor sentiment. He points out that most railway stocks had corrected sharply from their 2024 peaks, falling 30% to 50%. Despite solid order books, there hasn’t been a meaningful increase in the government’s railway capex allocation. What we’re seeing now, he says, is classic retail exuberance with traders chasing momentum rather than earnings.
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While not obvious at first glance, the defence-railway link isn’t entirely imagined either.
Dr. Vikas Gupta of OmniScience Capital argues that the rise in rail stocks may well be an extension of the broader defence theme. With Operation Sindoor still potentially active, there is likely increased focus on logistics, mobilisation and connectivity — all of which require railway infrastructure. From troop movement to specialised military freight, the railways play a silent but strategic role in national defence.
Quoting Chinese military strategist Sun Tzu, who wrote ‘The Art of War’ Book, he said the line between disorder and order lies in logistics. Therefore, Gupta said there are a lot of opportunities around other dimensions of defence beyond the pure-play weapons manufacturers.
But even he cautions that sentiment may be running ahead of valuations.
The exuberance is drawing comparisons to last year’s mania, where PSU stocks — defence, rail, infra — all rallied on the promise of capex and Atmanirbhar Bharat theme. The euphoria, back then, ended with a painful correction.
Bhowar also flags that while the structural story of Indian railways remains strong, many stocks are now trading above historical valuations. These companies are tethered to government orders and follow long business cycles. Without a meaningful spike in earnings or fresh policy announcements, current prices look stretched.
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That concern is echoed by Akshay Badjate of Merisis PMS, who sees parallels between today’s rally and the overheated peaks of 2024. He notes that while the railways sector is supported by a Rs 2.5 lakh crore budget and expected to see 15% revenue growth, stocks like IRFC — trading at 3.5x price-to-book despite stagnant earnings — are flashing warning signs. In his view, the current rally is being propped up more by investor frenzy than fundamentals.
Some institutional investors have already stepped back. At Merisis, Badjate says the fund has adopted a “wait and watch” stance on PSU capex plays, instead allocating capital to under-owned sectors like housing finance, pharmaceuticals, agri and metals — areas they believe offer better value.
Even Kotak Institutional Equities has sounded the alarm. Sanjeev Prasad’s recent note warned of irrational exuberance gripping the market, with mid- and small-caps — and particularly “narrative stocks” like defence — trading at frothy valuations. He points out that the market has repeatedly bought into half-baked stories, only to be burned when the narrative collapses.
There are, of course, genuine tailwinds. Tube Investments recently announced a Rs 1,000 crore train set contract — a deal that could revive momentum in its metal-formed division. But one deal does not make a sector-wide rally.
So, is the defence-rail connection real or just a narrative investors are desperate to believe? What’s clear is that in the current market, stocks need no justification. A story is enough. And right now, railways and defence are Dalal Street’s hottest plot twist.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
