India's high-flying defence sector has hit a significant air pocket, with stocks losing considerable momentum over the past six months. This sharp correction has left investors questioning whether the era of easy gains in this thematic space has come to an end.
A Sharp Correction in Defence Equities
The Nifty India Defence index has declined by approximately 15% over the last six months. This performance starkly underperforms the benchmark Nifty50, which managed a gain of 5% during the same period. Major players in the sector are now trading significantly below their yearly peaks.
Frontline stocks like MTAR Technologies, Paras Defence, Bharat Electronics, Bharat Dynamics, Taneja Aerospace, and Zen Technologies are currently between 9% and 47% below their respective 52-week highs. Despite this steep fall, some institutional signals hint at long-term confidence. HDFC Mutual Fund resumed SIP registrations for its HDFC Defence Fund on 23 December, while defence electronics firm Tonbo Imaging has filed its draft prospectus with Sebi.
Valuation Concerns and Lumpy Growth
Market experts, however, are sounding a note of caution. They point to rich valuations, uneven growth patterns, and cash-flow risks as major hurdles. According to Ashwani Shami of Omniscience Capital, defence stocks are still not attractive from a bumper-returns perspective because their prices remain expensive. A simple fall from highs does not automatically make them fairly valued.
The valuation metrics are indeed a concern. Bharat Electronics trades at a price-to-earnings (P/E) ratio of 54.9, nearly double its five-year average of 27.6. Similarly, Hindustan Aeronautics Ltd (HAL) commands a P/E of 34.9, well above its long-term average of 19.7. Astra Microwave Products is priced at about 60 times earnings.
Shami highlights that the primary issue is not the order book but the "lumpy" nature of growth in the defence sector, which leads to unpredictable earnings visibility. He believes much of the expected growth is already factored into stock prices. For meaningful outperformance, companies would need to deliver sustained double-digit growth in sales and EBITDA over several quarters.
Execution is Key to Future Performance
A contrasting, more constructive near-term view comes from a Nirmal Bang Institutional Equities report dated 4 December. It noted that defence companies under its coverage posted a stronger-than-expected Q2FY26. Aggregate revenue, EBITDA, and net profit grew by 19%, 15%, and 19% respectively, surpassing estimates.
This performance was driven by healthy execution, with Data Patterns, Bharat Dynamics, Bharat Electronics, Paras Defence, and Solar Industries named as top performers. The brokerage expects a strong second half for the industry, supported by large order books, favourable government policy, and rising localization.
Order-book visibility remains robust. For instance, HAL's order book surged from ₹82,154 crore in April 2022 to ₹1.89 trillion by the end of the March 2025 quarter. Bharat Electronics saw its order book rise to ₹74,859 crore as of 1 July 2025 from ₹55,300 crore three years prior.
Despite this, Amit Anwani of PL Capital cautions that any market-beating performance will likely be restricted to a select few stocks. Private defence players, in particular, face risks from stretched receivables, long payment cycles, and inventory build-up, which can strain cash flows. Execution delays, regulatory clearances, raw material inflation, and currency fluctuations are other key factors to monitor.
The prevailing market view suggests that while the long-term growth story for India's defence sector remains intact, the phase of broad-based, easy gains is likely over. Outperformance from here will be highly stock-specific, dependent on consistent execution, margin management, and the ability to translate massive order books into smooth, profitable revenue.
