Infrastructure is expected to be back in focus after the BJP win in Maharashtra, but the stocks that will ride the new wave may not be the earlier darlings even as they have corrected sharply. These two themes – railways and defence - once the darlings of Dalal Street in early 2024, have lost steam, with stocks correcting as much as 40 percent from their peaks, but analysts continue to remain cautious. That’s because even as the recent correction in Indian markets from record-high levels has brought valuations closer to their five-year average, valuation of stocks in these sectors remain at elevated levels, raising questions about their sustainability.
Ambareesh Baliga, an independent market analyst, argued that even after the steep correction, railway and defense stocks still appear expensive.
"We’ve seen stocks rising 15x, but profits have only grown 3–4x. This disparity between valuations and fundamentals remains concerning. Recent corrections haven’t made these stocks any more attractive," he explained.
Adding to the conversation, Hemant Shah, fund manager at Seven Islands PMS, stressed the importance of execution over order book size. "While these companies boast robust order books, timely execution is critical. Smaller players in the defense and railways space may outperform giants like HAL and BEL as they can execute faster and help clear the backlog," he said.
The numbers paint a sobering picture. Defense stocks such as Bharat Dynamics, Hindustan Aeronautics, and Bharat Electronics have declined by up to 42 percent from their peaks. Railway stocks, including IRFC, RVNL, and Titagarh Rail, have also fallen by 18–35 percent.
The July–September quarter (Q2) failed to inspire confidence. According to Elara Securities, sales growth was muted across both sectors due to execution delays caused by heavy rains and a slowdown in order inflows. "The railways sector faced deferred orders as government priorities shifted, while rising competition eroded margins. In defense, execution remained healthy, but order inflows were subdued," the report noted.
Individually, Hindustan Aeronautics' Q2 performance missed Street estimates. Revenues grew modestly by 6 percent YoY in Q2 due to a lower proportion of manufacturing income, while EBITDA increased by 7 percent YoY. Analysts at ICICI Securities expect near-term execution to be impacted by delays in the supply of F-404 engines from GE Aerospace.
Bharat Dynamics, too, reported a weak September quarter performance as net profit fell by 17 percent YoY, and revenue declined by 11 percent YoY.
Meanwhile, railway stocks like RVNL and IRFC also delivered disappointing Q2 results. RVNL's profit dropped by 27 percent YoY and missed Street estimates, while revenue decreased by 1 percent. On the other hand, IRFC posted a modest 4 percent YoY growth in profit, while revenue increased by 2 percent YoY.
At this time, Aishvarya Dadheech, founder and CIO at Fident Asset Management, advised caution. "Investors should remain selective as valuations continue to hover on the higher side. Look for companies with clear execution capabilities and realistic growth potential," he recommended.
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