The defense sector, which witnessed remarkable growth in recent months, is now showing signs of slowing down. Mutual funds sold off a total of ₹1,713 crore in June. Experts believe that valuations have reached very high levels, prompting fund houses to book profits.
The largest sell-off occurred in Solar Industries India, where mutual funds withdrew ₹952 crore. Following this, shares worth ₹192 crore were sold in Zen Technologies and ₹165 crore in Bharat Forge. Additionally, names like GRSE, Cochin Shipyard, and Mazagon Dock also saw significant selling.
Momentum Slows Down After Operation Sindoor
In recent months, Operation Sindoor and the Indian government's defense deals propelled defense stocks to new heights in the stock market. Moreover, the defense budget targets set by NATO countries for 2035 also created a positive environment for this sector. However, with valuations at their peak, large institutional investors have begun to reduce their positions.
The Nifty India Defence Index has fallen by 4 percent in a month. GRSE, Astra Microwave, and Cochin Shipyard recorded double-digit declines. Solar Industries is down 9 percent, and HAL has fallen by 3 percent.
Brokerage Houses Also Cautious
Motilal Oswal has given a 'Neutral' rating to Bharat Dynamics and set a target of ₹1900, which is below the market price. The brokerage says that although the company has many orders, the current share price is already quite high.
Harsha Upadhyay, CIO of Kotak AMC, has also distanced himself from any new positions for the time being. He believes that the risk in defense stocks has increased at the current valuations.
Sector's Long-Term Position Still Strong
Although there may be pressure in the short term, the long-term prospects for the defense sector still remain. NATO's 5 percent defense spending target by 2035 and the approval of ₹1 trillion worth of deals by the Defence Acquisition Council in India could energize the sector in the coming years.
In its report, the Nuama Group said that an annual growth of 7 to 8 percent is possible in defense electronics in the next five years. They have included BEL and Data Patterns in their top picks.
Order Inflow to Remain Strong in FY26
ICICI Securities, in its report, said that the order inflow for defense companies will remain better in the financial year 2025-26. Companies like Solar Industries, Azad Engineering, and Astra Microwave have been given a potential growth of 25 to 30 percent. At the same time, HAL, BEL, and MIDHANI have been identified as preferred stocks in the DPSU segment.
Challenges for the Defense Sector Also Remain
Market experts say that the biggest challenge for the defense sector will be order fulfillment. Delivering on time is especially difficult for government companies. In addition, increasing production capacity and improving quality are also important issues for this sector.
Meanwhile, ongoing geopolitical tensions at the global level will also determine the direction of this sector. Developments in wars, border disputes, and defense partnerships can affect the movement of defense stocks.
