Defence stocks lose momentum. Does it signal the end of easy gains?

Frontline defence stocks, including MTAR Technologies, Paras Defence, Bharat Electronics, Bharat Dynamics, Taneja Aerospace and Zen Technologies, are now between 9% and 47% below their 52-week highs.

Even so, institutional signals continue to indicate long-term confidence. HDFC Mutual Fund has resumed systematic investment plan (SIP) registrations in the HDFC Defence Fund as of 23 December, while defence electronics manufacturer Tonbo Imaging has filed its draft red herring prospectus with markets regulator Securities and Exchange Board of India (Sebi)—moves that suggest growing institutional and promoter confidence in the sector.

However, experts caution that rich valuations, lumpy growth and cash-flow risks mean only a handful of companies may be able to outperform the broader market from here. While sentiment around the defence theme has cooled, conviction in the sector’s long-term growth story remains intact.

The key question, then, is whether there are enough cues for defence stocks to deliver market-beating returns.

The prevailing view among market participants is that defence stocks may not deliver market-beating performance in the near to medium term. “Outperformance will hinge on consistent growth delivery and strong execution," according to Ashwani Shami, president and chief portfolio manager at Omniscience Capital.

Shami believes defence stocks are still not investable from a bumper-returns perspective, largely because valuations remain expensive. A fall from 52-week highs, he cautioned, does not automatically make these stocks fairly valued or attractive.

Valuations underline that concern. Bharat Electronics is currently valued at 54.9 times earnings, nearly twice its five-year average of 27.6 times. Hindustan Aeronautics Ltd (HAL) trades at 34.9 times earnings, well above its long-term average of 19.7 times. Astra Microwave Products is priced at about 60 times earnings, compared with its five-year average of 41.2 times.

The concern, he says, is not the order book but the lumpy nature of growth in the sector, which leads to uneven earnings visibility.

In his view, much of the expected growth is already priced in, and only sustained double-digit growth in sales and Ebitda over multiple quarters could drive meaningful outperformance. At current levels, he does not see a strong case for the sector beating the broader market. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Execution matters

A 4 December report by brokerage firm Nirmal Bang Institutional Equities painted a more constructive near-term picture. Defence companies under its coverage posted stronger-than-expected performance, with revenue, Ebitda and net profit rising 19%, 15% and 19%, respectively, in Q2FY26 compared with estimates of 15%, 15% and 4%.

The performance was driven by healthy execution, though Ebitda margins at 24.5% came in slightly below estimates due to provisions at HAL.

Data Patterns, Bharat Dynamics, Bharat Electronics, Paras Defence and Solar Industries emerged as the top performers, the brokerage firm said.

The brokerage expects the second half to be strong to healthy for the Indian defence industry. “On aggregate, the sector is well positioned to deliver meaningful revenue growth, supported by a large order book, favourable government policy, and rising localization."

It believes margins and profitability across many mid-to-large firms could improve further if working capital remains under control and execution stays on track.

Order-book visibility remains robust. According to brokerage firm PL Capital’s Amit Anwani, while a fresh three- to five-fold jump in order books may be limited, most defence companies still enjoy strong visibility.

HAL’s order book rose from ₹82,154 crore in April 2022 to ₹1.89 trillion by the March 2025 quarter-end, while Bharat Electronics order book climbed to ₹74,859 crore as of 1 July 2025, from ₹55,300 crore three years earlier.

That said, Anwani cautioned that any outperformance versus the broader market is likely to be limited to a handful of stocks, given company-specific challenges.

Private defence players, in particular, face risks from stretched receivables, long payment cycles and inventory build-up, which can pressure cash flows and profitability. Execution delays and regulatory clearances may also affect deliveries and revenue recognition, market participants said.

Raw material inflation, currency fluctuations and global supply-chain disruptions remain key factors to watch going ahead, as these could influence margins and cash flows even for companies with strong order-book visibility.