As the world welcomes 2025 amid geopolitical concerns, brokerages and market participants continue to remain positive on defence stocks as they see more legs in the rally in select pockets due to strong order inflows and government's focus, despite rich valuations in the pocket.
The NSE India Defence index corrected 22 per cent from its July 2024 peak but experts still believe that India's defence story has not diminished. They have a positive outlook, with a word of caution and select stocks give a meaningful opportunity to investors post recent corrections.
Following a significant slowdown in domestic orders, the DAC's approval of AoNs worth Rs 218 billion across five proposals is a positive development, said Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers. Bharat Electronics and Data Patterns are his key picks from the sector.
In the defense sector, Hindustan Aeronautics Ltd and Mazagon Dock Shipbuilders Ltd emerge as compelling choices for long-term investors, underpinned by their strong fundamentals and growth potential, said Ajit Mishra - SVP, Research, Religare Broking.
Both Hindustan Aeronautics and Mazagon Dock Shipbuilders exhibit clear growth drivers and maintain reasonable valuations compared to peers, making them attractive options for investors seeking value in the defense sector, he said.
The Indian defence sector has given several multibaggers during the past three years, with stocks rising by a whopping 3-4 times to 8-10 times between September 2022 and July 2024, before correcting from peak in July 2024. On the contrary, execution hurdles continue to remain a key challenge for the defence players.
Surjitt Singh Arora, Portfolio Manager - PMS, PGIM India AMC said that ordering in defense has picked up as can be seen from order inflows of defense companies. "Valuations have run ahead of fundamentals in our assessment. We would be cautious in this space," he said.
Some stocks are trading at premiums to their fundamentals, but not so for Hindustan Aeronautics, said Jathin Kaithavalappil, Assistant Vice President Choice Broking. "Given the increasing orders for Tejas fighter jets to fill military requirements, the company seems well-positioned to continue growth," he said, supporting Mishra's view.
NSE's defence sector barometer has gained about 55 per cent in the last one year, with a number of stocks including Mazagon Dock, Paras Defence, DCX India, Zen Technologies, Astra Micro and others delivering multibagger returns to investors 2024. However, some stocks like MTAR Technologies, Cochin Shipyard and Bharat Dynamics failed to repeat their previous record.
Two critical changes that have taken place in the defence sector are significant increase in scope due to indigenisation drive and opening up of export opportunities, said Shiv Chanani, Senior Fund Manager - Equity Baroda BNP Paribas Mutual Fund. "However, the record order books provide high revenue visibility for the companies. On the flip side it is the extremely high valuations," he said.
Saurabh Jain, Managing Director & Head, Wealth Solutions at Standard Chartered Bank, India, believes the defence sector has further legs upwards, given the need for better security preparedness in a polarised world order. "The government’s recent focus on defence sector indigenization and step-up in capex outlays, are tailwinds for the sector," he said.