Defence sector has delivered 200% return in last one year: Is it the right time to invest in defence stocks?
Experts are optimistic about the sector’s long-term prospects, given the substantial investment and demand anticipated in the coming years. “The focus on modernising and upgrading defence systems, along with geopolitical tensions with neighbouring countries like China and Pakistan, means that the defence expenditure will continue to grow,” says Abhinav Kapadia, Research Analyst, Asit C. Mehta Investment Intermediates. “The growth is not just momentary. The sector has significant potential for future growth. The large order books of companies and the government favouring import substitution provide a strong foundation for sustained growth,” says Nirav Karkera,Head of Research, Fisdom.
According to the Nomura report, the sector is expected to present an ordering opportunity worth $138 billion over the fiscal years 2024 and 2032. The report also classifies Hindustan Aeronautics Limited and Bharat Electronics as strong buys with an upside potential of 28% and 32%, respectively.
Nifty India Defence has outpaced Nifty 50
However, it is important to have realistic expectations. “The pace of growth will not be as rapid as seen in the recent past, and the markets are likely to wait for earnings to catch up with the valuations,” adds Karkera. Some defence stocks are trading at three-digit PEs (see table). There are three factors that have pushed the valuations of defence stocks to stratospheric heights.
Large order books: Companies such as HAL and Bharat Dynamics have substantial order books. These large, confirmed
