Defence, Railways Steal The Show As Capex, Flows Lift Market Sentiment: Motilal Oswal
The rally in these sectors was fuelled by 'strong order book growth and a recovery in mid- and small-cap sentiments'.
India's defence and railway sectors are in the spotlight, hitting record market capitalisations in May 2025, driven by strong order flows and a broader re-rating in sentiment. According to Motilal Oswal Financial Services, the defence sector logged a market cap cumulative growth of 55% between fiscal 2019 and May 2025, while railway stocks grew at a CAGR of 46% over the same period.
"The defence and railway sectors saw significant gains over the past two months, following a dip in March 2025," the report noted, adding that the rally was fuelled by "strong order book growth and a recovery in mid- and small-cap sentiments." Aggregate profit after tax for defence has grown at 23% CAGR, while for railways it's been a steady 15%.
The sharp recovery was not limited to these sectors. A broad-based rebound was visible across the NSE-500 universe, where 14 sectors posted gains of over 15% between the March lows and May. Capital goods, infrastructure and media were among the key outperformers, while technology remained flat. "Most of the NSE-500 sectors experienced a sharp decline between Sept. 2024 and March 2025, with 17 sectors falling by more than 15%," Motilal Oswal said.
Government spending was another big driver. Central capex hit an all-time high of Rs 2.4 lakh crore in March 2025, a 68% jump year-on-year. For the quarter, capex came in at Rs 3.7 lakh crore, up 33% yearly, accounting for 35% of the full-year fiscal 2025 spend. "The worst of the monthly capex slowdown is behind us," the brokerage noted.
Flows too were encouraging. Domestic institutional investors poured in $7.9 billion in May, their third-highest monthly tally ever, while foreign investors added $1.7 billion. "This led to a record 14-month high institutional flow," Motilal Oswal observed, noting that while FIIs remain net sellers year-to-date, DIIs have provided a strong counterbalance, with cumulative inflows of $33 billion so far this year.
However, valuations remain elevated. The Nifty 50's one-year forward P/E stood at 21.2 times, about 3% above its long-term average. "Large-cap valuations are above average; broader markets still expensive," the report said.
On the macro front, real GDP grew 7.4% in the March quarter, beating estimates and marking the fastest growth in four quarters. "The acceleration in GDP growth was led by robust growth in real fixed investments and a higher contribution of net exports," Motilal Oswal noted.
Still, private consumption remained weak, growing at just 6% — a five-quarter low — while government consumption contracted 1.8%, the sharpest fall in 17 quarters.
As fiscal 2026 is underway, hopes for a consumption revival now rest on a strong monsoon, income tax cuts in the Union Budget, and potential rate cuts. Lower inflation can help in boosting real private final consumption expenditure," Motilal Oswal said, but cautioned that high household debt and stagnant rural wages remain structural overhangs.
