Stock prices of defense companies plunge by 12% over the past month: Are overvaluations a significant issue post Operation Sindoor?
Defence stocks in India, as represented by the Nifty India Defence Index, have experienced a 12% decrease over the past month. This correction, according to Dr. Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital, is a "normalisation" after Operation Sindoor and the subsequent global interest in Indian defence products.
The correction is primarily due to a reevaluation of stretched valuations, easing geopolitical tensions, concerns over delivery delays and execution risks, and profit booking by investors. Many analysts believe that the defence sector's near-term positives are largely priced in, leading to a reassessment of valuations.
The high valuations, driven by geopolitical optimism and events like Operation Sindoor, have led investors to start booking profits, resulting in selling pressure. As geopolitical tensions have somewhat normalized or eased, the urgency and speculative appeal of defence stocks have diminished, causing valuations to retract.
Concerns about the ability of companies to meet large order flows on time have surfaced, introducing risk factors that investors are now factoring in. These worries have contributed to the downward pressure on share prices.
The Nifty India Defence Index has declined about 11-15% from its peak in June 2025, moving into oversold territory according to relative strength index (RSI) indicators. This technical sell-off suggests a market correction following rapid gains earlier in the year.
Despite the recent corrections, many of these stocks still maintain strong year-to-date gains. For example, Bharat Electronics Limited (BEL) has seen a 32% increase, and Garden Reach Shipbuilders has experienced a 52% growth. This indicates that the long-term fundamentals linked to India's defence procurement and geopolitical environment remain positive.
Execution remains a key factor to watch out for, as valuations are significantly high at the moment. Zen Tech, Mazagon Dock, and BEL are among the counters that have seen significant losses. Harshit Kapadia, Vice President of Elara Capital, notes that the new order flow is slower than anticipated.
The return-on-equity for many defence sector counters is between 10-20%. Sector analysts are optimistic about the long-term prospects of defence stocks, due to increased allocation for defence capex and a predicted improvement in order inflow in the second half of the fiscal year.
Many market observers and analysts believe that most of the positives have been priced into the defence sector. Despite the recent fall, the Nifty India Defence Index is still close to 58-60 PE. New orders are expected to continue coming in, and the defense budget is estimated to increase at a faster pace compared to GDP growth over the next 10 years, reaching 3-4% of GDP.
Kapadia is positive on the defence space for the long term, citing global expectations of large defense capex and an increase in India's defense capex from 1.9x GDP to 2.5x GDP. The 'best defence stocks screener' on website.com lists Bharat Dynamics, Paras Defence, Garden Reach Shipyard, Cochin Shipyard, and BEML trading at PE ratios between 108x and 80x.
In summary, the current downward trend is a market correction driven by profit booking, valuation reassessment, easing geopolitical tensions, and concerns over execution risks, rather than a change in the fundamental long-term outlook for defence stocks. However, execution remains a key factor for most companies in the defense sector, and investors should keep a close eye on this aspect.
- Despite the ongoing correction, many defence stocks in India, such as Bharat Electronics Limited and Garden Reach Shipbuilders, have still maintained significant year-to-date gains.
- The high valuations of defence sector stocks have prompted some investors to book profits, leading to selling pressure as geopolitical tensions have eased.
- Concerns about execution delays and risks have emerged, potentially contributing to the downward pressure on share prices in the defense sector.
- Market observers and analysts, although recognizing the market correction, remain optimistic about the long-term prospects of defense stocks, due in part to increased allocation for defense capex and predicted improvement in order inflow.
