Defence Stocks up 40% Post Operation Sindoor: Should You Invest?

Several defence stocks, including Bharat Dynamics (BDL), Bharat Electronics (BEL) and Ideaforge Technology have surged in the recent sessions following Operation Sindoor. As the valuations went higher analysts are of the opinion that defence stocks have a long-term investment potential.

Previously, India launched Operation Sindoor in Pakistan and Pakistan-occupied Kashmir targeting nine terror camps. This was done to avenge the victims of the Pahalgam terror attack on April 22, that killed 26 people.

India’s retaliation has brought light on the effectiveness, efficiency, and strength of indigenous defence equipment.

Defence stocks surged in the range of 5-40 per since May 8.

Shares of Ideaforge Technology, Mishra Dhatu Nigam, Zen Technology, Data Pattern, BDL, BEL, Bharat Forge, BEML and Hindustan Aeronautics (HAL) went past 10% since May 8.

“Defence stocks have been rallying strongly, driven by the success of indigenous defence equipment during the India-Pakistan tensions and robust government support for promoting domestic defence manufacturing,” said Ajit Mishra, SVP of research at Religare Broking.

“After India-Pakistan tension, global attention on India's defence sector has increased due to showcasing its defence prowess, capability and efficiency in the products, which can be one reason for the recent rally in assumption for global business export opportunities. At the same time, many defence stocks delivered stronger than expected Q4 earnings, which triggered an additional rally in the sector stocks,” said Prashanth Tapse, Senior VP of research at Mehta Equities.

Is it advisable to invest in defence stocks in the long term?

Despite being overvalued, the sector remains a healthy bet in the long run as the country is expected to increase its defence budget in the upcoming years.

“Although the sharp rally has led to stretched valuations, the sector remains a compelling long-term investment opportunity. Ongoing geopolitical uncertainties and security challenges are expected to push India’s defence budget—currently at 1.9 per cent of GDP—higher in the coming years, providing further momentum to the sector,” said Mishra.

“Few stocks are trading as high as 120 times and as low as 40 times price to earnings, which is a very wide range for justifying expensive versus cheap. It is better to wait and watch for some correction in the price, reasoning that profit-booking attempts at higher levels. High valuations are justified due to massive visibility in future earnings, strategic importance, strong balance sheet with negligible debt and high order book momentum,” said Tapse.

According to Tapse, the defence sector is poised for a multi-year growth story for a period of 4-5 years.

“Post the current demonstration, it has enhanced investor confidence, and global attention can bring in high export potential business. We expect the Indian defence sector to witness a CAGR of 12–15 per cent over the next five years, driven by Make in India, export push, strong, increasing domestic procurement post India-Pakistan tension and higher capital expenditure in the annual defence budget,” Tapse said.