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The Indian defence sector, which experienced significant growth in the early part of 2025 driven by factors like robust order flows and the widely publicized Operation Sindoor, is now facing a period of turbulence. Several prominent defence stocks, including Mazagon Dock and Cochin Shipyard, have witnessed substantial declines in their share prices, with some falling as much as 18% in the preceding month. This downturn has negatively impacted the Nifty India Defence index, raising apprehensions regarding potentially inflated valuations, delays in project delivery, and overall execution risks within the sector. Previously, geopolitical factors and optimistic export prospects fueled the sector's growth; however, the market sentiment has shifted considerably in recent weeks, resulting in widespread declines across the board. The Nifty India Defence index has decreased by 11% since late June, with all of its constituent stocks experiencing negative performance. Companies such as Garden Reach Shipbuilders, Paras Defence, Zen Technologies, and Mazagon Dock have recorded significant drops in their stock values, while even larger players like Hindustan Aeronautics (HAL), BEML, and Bharat Electronics (BEL) have undergone corrections ranging from 6% to 8%. Despite the recent setbacks, the year-to-date performance of many defence stocks remains positive. For instance, Garden Reach is still up 52% in 2025, Paras Defence has climbed 34%, and BEL is 32% higher. However, certain companies like Zen Technologies and BEML have underperformed, with Zen experiencing a 35% decline year-to-date. Despite the recent decrease in stock prices, the valuation of the defence sector remains elevated. The Nifty India Defence index currently trades at a price-to-earnings ratio of 54.5x, which is more than double the 21.8x multiple observed on the Nifty 50. This suggests that investors are still willing to pay a premium for defence stocks, but the recent pullback indicates a growing concern about whether these valuations are justified.
The recent earnings reports from several defence companies have played a significant role in the market correction. Shares of Mazagon Dock Shipbuilders experienced a 5.2% decline following the company's announcement of a 35% year-on-year decrease in consolidated net profit for the June quarter, amounting to Rs 452 crore. Similarly, Zen Technologies witnessed a sharp drop in its stock price after reporting a 56% plunge in revenue and a halving of profit to Rs 37.1 crore. Even BEL, despite posting a 25% rise in quarterly profit to Rs 969 crore, faced pressure as its revenue fell short of both internal and market expectations by 7–9%. These earnings results served as a reality check for investors, highlighting the potential for discrepancies between market expectations and actual financial performance. Several analysts have weighed in on the current state of the defence sector, offering their perspectives on the ongoing market correction. Ajit Mishra, SVP, Research at Religare Broking, believes that the sector's technical signals are indicative of a confirmed short-term downtrend. He points to the series of lower highs and lower lows, as well as the decisive break below the 20-day and 50-day moving averages, as evidence of bearish momentum. Mishra identifies key support levels around 7,600 and major support near 7,270, which corresponds to the 200-day exponential moving average. He cautions that there are currently no clear signs of a near-term reversal and that the slope of the short-term moving average is now turning downward, further suggesting bearish momentum.
Kunal Kamble, Sr. Technical Research Analyst at Bonanza, offers a slightly more optimistic perspective, viewing the current decline as a technical correction within a larger uptrend. He suggests that the Nifty Defence index is currently riding its 4th wave, which is a corrective wave in the 5-wave impulse structure. Kamble notes that the index has rebounded from its Potential Reversal Zone (PRZ) between 7,621 and 7,195, but he cautions that it is too early to definitively call it a confirmed reversal. For that to occur, the index would need to move above 8,300. Kamble adds that the index is currently in oversold territory and appears attractive at the current level for investors with a higher risk appetite. However, he advises more conservative investors to wait for a move above the 50-day EMA before entering the market. Fundamentally, analysts suggest that the market is beginning to differentiate between hype and actual delivery within the defence sector. Nitant Darekar, Research Analyst at Bonanza, believes that the current correction in defence stocks is primarily driven by valuation concerns following unsustainable price levels, but that execution concerns are adding further pressure. He cites HAL's inability to deliver Tejas Mark 1A fighter jets due to delays in GE F404 engine supplies as an example of supply chain vulnerabilities. While the long-term growth story for the defence sector remains intact, underpinned by international demand for products like BrahMos missiles and Garuda drones, investors are now closely scrutinizing execution timelines. Darekar warns that execution delays could jeopardize India's reputation as a reliable defence supplier. Putta Ravi Kumar, Analyst at Choice Institutional Equities, concurs that the pullback is more than just a valuation reset. He points to delays in the allocation of emergency procurement funds as creating uncertainty around near-term order visibility and execution timelines. Kumar notes that while robust order books indicate strong demand, markets are no longer rewarding order wins in isolation.
Kumar further states that the Q1 earnings season acted as a reality check, separating narrative-driven momentum from operational delivery. Despite the overall correction, Kumar sees selective opportunities in specific companies. He believes that the risk-reward ratio is particularly favorable in names like BEL and HAL. BEL continues to benefit from rising demand for electronic warfare and radar systems, while HAL stands out with its unmatched execution in indigenous platforms. In conclusion, while the broader outlook for India's defence sector remains promising, the current correction has reset investor expectations. As sentiment shifts from euphoria to scrutiny, analysts advise investors to look beyond headlines and order books and focus on companies with credible delivery, margin stability, and supply chain control. The rally that followed Operation Sindoor may have been driven by optimism, but the future performance of defence stocks will likely be determined by execution. The current market conditions demand a more discerning approach to investment in the defence sector, with a greater emphasis on fundamental analysis and a focus on companies that can consistently deliver on their promises. Investors need to carefully assess the risks and rewards associated with each company, taking into account factors such as execution capabilities, supply chain vulnerabilities, and the overall macroeconomic environment. Only by adopting a more cautious and informed approach can investors hope to navigate the current market turbulence and achieve long-term success in the Indian defence sector.