Defence stocks lose momentum. Does it signal the end of easy gains?

Sebi)—moves that suggest growing institutional and promoter confidence in the sector.However, experts caution that rich valuations, lumpy growth and cash-flow risks mean only a handful of companies may be able to outperform the broader market from here. While sentiment around the defence theme has cooled, conviction in the sector’s long-term growth story remains intact.The key question, then, is whether there are enough cues for defence stocks to deliver market-beating returns.The prevailing view among market participants is that defence stocks may not deliver market-beating performance in the near to medium term.

“Outperformance will hinge on consistent growth delivery and strong execution,” according to Ashwani Shami, president and chief portfolio manager at Omniscience Capital.Shami believes defence stocks are still not investable from a bumper-returns perspective, largely because valuations remain expensive. A fall from 52-week highs, he cautioned, does not automatically make these stocks fairly valued or attractive.Valuations underline that concern.

Bharat Electronics is currently valued at 54.9 times earnings, nearly twice its five-year average of 27.6 times. Hindustan Aeronautics Ltd (HAL) trades at 34.9 times earnings, well above its long-term average of 19.7 times.

Astra Microwave Products is priced at about 60 times earnings, compared with its five-year average of 41.2 times.The concern, he says, is not the order book but the lumpy nature of growth in the sector, which leads to uneven earnings visibility. In his view, much of the expected growth is already priced in, and only sustained double-digit growth in sales and Ebitda over multiple quarters could drive meaningful outperformance.