Defence stocks: After a sizzling rally between April and June in the wake of India’s Operation Sindoor and growing order book, defence stocks have taken a back seat lately. The Nifty India Defence index has lost 11% in the last one month, with all 18 index constituents in the red.
Many prominent and high-flying defence stocks like Cochin Shipyard, Garden Reach Shipbuilders, Mazagon Dock, Zen Technologies and Paras Defence, among others, have seen a high double-digit decline of 15-19% in their share prices in the last one month. Meanwhile, several other names like Hindustan Aeronautics (HAL), BEML and BEL are down 8-9% during this period.
Why are defence stocks falling?
Analysts largely attribute the reversal in trend of the defence stocks to valuation concerns following a massive rally and weakness in the results performance in the ongoing June quarter earnings season.
After sharp rallies in many names, investors have started booking profits. The pullback is a natural consolidation, not a capitulation, said Mihir Vora, CIO at TRUST Mutual Fund.
According to Ajit Mishra of Religare Broking, this pullback in defence stocks is mainly driven by valuation concerns. The order book is there, which means execution becomes critical for them, said Mishra.
Investors often value defence companies on the visibility of earnings over the next 3–5 years, so a strong order book improves confidence in revenue projections. But the order book isn’t the only metric; investors also track how well the company executes those orders, as timely execution results in better revenue flows and margin.
The order books for most of the defence companies remain strong with more than 3-5 years’ worth, and new orders are likely to continue coming in, as per experts.
According to data shared by Omniscience Capital, HAL has an order book of ₹1,89,300 crore as of FY25. Meanwhile, Nifty 50 company BEL’s order book stands at upwards of ₹71,500 crore. Mazagon Dock Shipbuilders’ order book stands at ₹32,000 crore as of FY25, while GRSE, Cochin Shipyard and BDL all have an order pipeline of over ₹22,000 crore each.
“The long-term budget allocation clearly shows the defence budget is likely to increase at a much faster pace compared to GDP growth over the next 10 years, reaching 3%-4% of GDP. This is still small compared to 5% of GDP being targeted by NATO countries. However, one should not be pulled into the euphoria of growth and should be very focused on the growth vs valuation question as an investor,” said Dr Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital.
While we expect double-digit growth, probably mid to high teens, for many companies for many years, this might still not justify the valuations for some of them, he added.
Despite the recent fall, the Nifty India Defence index trades at 54.5x, the P/E ratio. At the same time, the P/E for the Nifty 50 index is 21.8x.
Also, execution remains a concern for many companies. If they don’t execute despite having order books, eventually, the valuations might turn out to be too high, Gupta opined.
Moreover, he also pegs the turnaround in defence names on the not-so-exciting quarterly numbers from most of the companies and “normalisation” after the extreme positive sentiments post Operation Sindoor and the subsequent interest globally for Indian Defence Products.
Mazagon Dock, which reported a massive fall of 35% YoY to ₹452 crore in its net profit, saw massive selling today. The defence PSU stock declined by over 5%. Similarly, Bharat Electronics’ share price declined over 2% in trade today after the Q1 results announcement yesterday.
Zen Technologies, which reported an overall muted set of Q1FY26 numbers as a slowdown in OI momentum persists for a fifth quarter in a row, saw a target price cut by Nuvama to ₹1800 from ₹2,170 earlier. The company’s revenue plunged 56% and PAT halved to ₹37.1 crore.
How should investors trade defence stocks now?
Mishra of Religare Broking doesn’t see any signs of reversal in the defence pack and said that there is a possibility that defence stocks would continue to be under pressure.
“There could be intermediate bounds every now and then, but the trend looks sideways in many cases. As of now, one should not jump into a trade. Short-term investors should refrain from any aggressive buying, Mishra opined.
However, long-term investors can selectively start accumulating quality names, he said. HAL, BDL and BEL are among the top stocks that Mihsra recommended.
Vora of TRUST MF said that the long-term fundamentals — rising defence budgets, dual-use platform opportunities, and improving export arcs — remain intact for defence stocks, making stock selection critical now. He advised picking stocks with strong balance sheets, clear execution histories, and pipeline visibility.
Meanwhile, Gupta of Omniscience Capital opined that investors should keep in mind that there are other dimensions of modern defence beyond the weapons, arms and ammunition.
“In the modern geo-strategic defence playbook, key resources, oil & gas, critical and strategic minerals (including rare earth metals), sea lanes and merchandise routes and their security, presence in strategic ports or locations, economic warfare, and other similar assets play a strategic role and one should re-architect their defence portfolio for the long term to take exposure to these through undervalued stocks,” he said.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
