Defence stocks on fire, led by GRSE and other shipyards, defying valuation worries

Defence stocks

Key defence stocks surged up to 11 percent on May 22, bucking the overall downturn in equity markets, powering the Nifty India Defence index up over 2 percent, its second session of gains.

Garden Reach Shipbuilders and Engineers (GRSE) was the top gainer on the index, soaring nearly 11 percent to highest level in over six months, after emerging as the lowest bidder for a Rs 25,000 crore project for the Indian Navy.

Solar Industries shares jumped over 6 percent, while Cochin Shipyard shares followed with an over 4 percent rise. Paras Defence and Mazagon Dock Shipbuilders shares meanwhile rose around 3 percent each. Bharat Dynamics (BDL) shares were up nearly 2 percent.

Hindustan Aeronautics (HAL) and Bharat Electronics (BEL) shares clocked modest gains.

Prime Minister Modi on May 22 lauded the Indian Armed Forces for their success in the Operation Sindoor, bringing focus on the defence pack, that has been buzzing since Op Sindoor.

"Our government gave a free hand to all three forces... Together, the three forces created such a Chakravyuh that Pakistan was forced to kneel down. The world and the enemies of the country have also seen what happens when Sindoor turns into gunpowder," the PM said while speaking in Rajasthan’s Bikaner. "In response to the attack on the April 22nd, we destroyed nine of the terrorists’ biggest hideouts within just 22 minutes," the Prime Minister said.

"Defence and Media were the only gainers for the day. India's key defence and aerospace companies reported strong earnings for the March quarter, with HAL, BEL, and GRSE surpassing expectations on both revenue and profit. Defence stocks continued to demonstrate structural growth, supported by government policies and positive management commentary. Shipbuilding companies led the gains, buoyed by recent Navy contracts," said Ravi Singh, Senior Vice President of Retail Research at Religare Broking.

In recent days, defence shares have seen significant volatility after a record run following Operation Sindoor. While the sector remains buoyed by Make-in-India tailwinds, strong export interest, and rising capex by both government and private firms, analysts are flagging frothy valuations. “Given current valuations, any earnings disappointment could derail the momentum,” said Pankaj Kumar, VP – Fundamental Research at Kotak Securities. “Right now, these stocks are riding strong sentiment, but the bar is high,” he said.

"The run-up in defence stocks is partly driven by rising India-Pakistan tensions, which have reaffirmed the sector’s strategic relevance," said Divyam Mour, Research Analyst at SAMCO Securities. "...price-to-earnings multiples have stretched, especially for private companies with aggressive growth expectations."

Mour said that the long-term drivers remain intact, but selective entry at more reasonable levels may be prudent. "Any pullback or consolidation could be an opportunity to buy into quality defence names with structural tailwinds," he added.