Defence stocks losing steam: Is the rally in HAL, Paras & Cochin Shipyard over?

The recent blistering rally in India’s defence sector appears to have lost steam, with profit-booking and lofty valuations taking centre stage. On May 20, shares of Paras Defence and Cochin Shipyard tumbled over 6% each, dragging the Nifty India Defence index down nearly 2% intraday. That setback follows a sharp 39% surge in the index since early May, fuelled by investor optimism around Operation Sindoor and emergency procurement approvals.

Valuations Stretched

Analysts warn that current price-to-earnings multiples for many defence names are hard to justify. Even though the long-term order book remains strong, earnings expectations now seem baked into share prices—leaving little margin for error if execution slips. A recent Groww report noted that ₹1.8 lakh crore of market-cap gains have outpaced actual contract wins, raising fresh valuation concerns.

Technical Indicators Flash Overbought

After a 350% climb between mid-2022 and mid-2024—and a 38% pullback by February 2025—the index reignited on renewed optimism earlier this year. Yet momentum oscillators are now rolling over, and many stocks trade near multi-year highs. In such zones, short-term profit-taking often eclipses new buying, setting the stage for choppy price action.

Execution Risks Linger

Even marquee players face headwinds. Hindustan Aeronautics Ltd. (HAL) was recently downgraded by UBS, which cautioned that near-term growth drivers are muted and that current revenues are largely priced in. HAL’s own Q4 results showed an 8% profit decline, citing Tejas Mk 1A delivery delays—an unwelcome reminder of execution risks in large, government-backed programmes.

Broader Market Caution

Foreign institutional investors, having pumped over ₹23,700 crore into Indian stocks in early May, may rotate out should global risk appetites wane. Indeed, the broader Nifty 50 slipped below the 25,000 mark as tech and defence names saw widespread profit-booking—signalling a potential shift away from recently overheated sectors.

Wait for a Pullback

With stretched valuations, lingering project delays and the risk of FII outflows, prospective buyers may be better served by waiting for a corrective dip—ideally back toward long-term moving averages—before re-entering the sector. Until then, the defence-stock party appears to be on pause.