INSUBCONTINENT EXCLUSIVE:
The multi-billion-dollar boom in defence stocks is showing signs of a slowdown, as mutual funds offloaded a staggering Rs 1,700 crore across
the post-Operation Sindoor rally.All the positive news around increased defence spending following Operation Sindoor, coupled with NATO's
defence spending targets creating a double-barrelled opportunity in both domestic and export markets, has now pushed valuations into
This has prompted institutional investors to hit the exit button.The selling spree was broad-based, with Solar Industries bearing the brunt
with outflows of Rs 952 crore, followed by Zen Technologies at Rs 192 crore and Bharat Forge at Rs 165 crore
GRSE saw selling worth Rs 153 crore, while Cochin Shipyard faced outflows of Rs 120 crore, and Mazagon Dock witnessed exits of Rs 96 crore,
according to estimates by Prime Database
Total gross selling stood at approximately Rs 1,713 crore.In stark contrast, buying was limited to a meagre Rs 100 crore across seven
stocks, including Bharat Dynamics, Unimech, and BEL.Also Read | Defence stocks retreat after up to 84% rally in 3 months
Is it time to book profits or hold?
Live EventsThe sell-off has been reflected in share prices, with the Nifty India Defence Index falling
around 4% over the past month
GRSE, Astra Microwave, and Cochin Shipyard have reported double-digit losses, while Solar Industries is down 9% and HAL has shed around 3%,
Khemani of Carnelian Asset Management, highlighting the frothy sentiment gripping the sector.Khemani's caution reflects a broader shift in
"It is not that tomorrow if we find an interesting company where the risk-reward is there, we will be buying those segments also, so I am
not making a broad judgment that we will not do anything, but it is just that those are the places where we are finding a little bit of
overenthusiasm in the marketplace and market participants," he added, suggesting that selectivity, not blanket avoidance, is the new
mantra.The warning signs are flashing red across the sector, with execution risks emerging as the new worry
Ambareesh Baliga sounded the alarm on what many investors are overlooking: "In fact, I am finding the valuations are a bit expensive at this
the issue would be on delivery, on execution, which not too many people are talking about
They have got huge orders, but how will they execute? I think that is the big issue."Baliga's concerns are particularly acute for the medium
"The issue is mostly on the defence side of the market because quite a few of them have got order books full for the next six-eight years,
and if they are not able to increase their capacity and deliver, that is where the issue would happen," he warned.Baliga pointed to HAL as
an early warning: "We have already seen that happening in HAL to some extent, that we should see across the other companies." This suggests
that the order book visibility that investors have been celebrating could become a liability if companies can't scale up operations to meet
demand.The recent downgrade of BDL by Motilal Oswal further weighed on sentiment, serving as a wake-up call for investors who had been
The brokerage initiated coverage on Bharat Dynamics with a 'neutral' rating and Rs 1,900 target price, nearly 4% below its then market
value, citing "lofty valuations."While the brokerage applauded BDL's strong order pipeline and export growth, it noted that the stock's
sharp run-up leaves "little room for near-term upside." The brokerage stated it would "look for lower price points to enter the stock,"
essentially telling investors to wait for a correction before jumping in.This cautious stance is becoming more common among institutional
Even seasoned bulls are turning cautious
Harsha Upadhyaya, CIO-Equity at Kotak AMC, who has been a long-term believer in the defence story, admitted: "While valuations are on the
higher side, we are not increasing our position at this point of time..
however, in the short term yes, the valuations are on the higher side so one needs to have a little bit of caution."Upadhyaya's comments are
particularly significant because Kotak AMC has been building defence positions since the government started focusing on indigenization
"We have been very positive on defence for quite some time now, and we started building our positions when the government started to focus
on indigenization, and also larger investments continue to happen into defence," he said, making his current caution all the more
noteworthy.The easing of tensions in the Middle East, particularly between Israel and Iran, had already begun to dampen sentiment, as
geopolitical risks that had supported defence stocks started to recede.Despite the near-term turbulence, the structural story remains
compelling for those willing to look beyond the current valuation concerns
The macro backdrop, including NATO's 5% defence spending target by 2035 and recent Defence Acquisition Council approvals worth Rs 1
trillion, continues to provide a solid foundation for long-term growth.Nuvama remains bullish on the sector's long-term prospects,
programs in the pipeline for Air Force and Navy."Also Read | Defence stocks decline as investors reassess valuations amid profit
bookingNuvama highlighted that "over the past three decades, India's defence spending growth rate has been among the highest (~8%) across
global defence superpowers due to import embargoes and growing export potential." This translates to an estimated $130 billion opportunity
over the next five to seven years.Immediate catalysts remain strong despite valuation concerns
Following Operation Sindoor, the government has approved Rs 400 billion for emergency procurement to fast-track military purchases, with the
Ministry of Defence recently clearing emergency procurement worth Rs 20 billion for various platforms
Additionally, the Defence Acquisition Council has approved Acceptance of Necessity (AoN) for 10 proposals amounting to Rs 1,050
billion.ICICI Securities expects robust order inflows in FY26, with most companies under its coverage guiding for revenue growth of over 15%
Securities lists Solar Industries, Astra Microwave, and Azad Engineering in the private space
Among DPSUs, it prefers HAL, BEL, and Midhani.However, the valuation challenge remains very real
conflict, this sector has once again taken off, with some stocks hitting record highs and trading at expensive valuations
So, it would be wise not to invest all at once in this sector
caught between compelling long-term growth drivers and stretched near-term valuations that have even the most bullish investors hitting the
