PSU majors drive Q1FY26 defence earnings in a soft quarter but analysts continue to flag high valuations

Among private players, Astra Microwave nearly tripled its profit to Rs 14.7 crore on revenue of Rs 199.7 crore, a 29 percent increase year-on-year, while DCX Systems reported a 61 percent revenue jump to Rs 222.2 crore with profit rising 41 percent to Rs 4.1 crore. Sika Interplant Systems more than doubled revenue to Rs 68 crore and profit to Rs 10.4 crore, a 96 percent increase from last year.

But others saw declines. Zen Technologies’ profit fell 33 percent to Rs 53.6 crore as revenue dropped 38 percent to Rs 158.2 crore from Rs 254.6 crore. Ideaforge swung to a loss of Rs 23.6 crore after revenue collapsed 85 percent to Rs 12.8 crore from Rs 86.2 crore a year earlier.

“Q1 FY26 revealed a tale of two narratives in Indian defence. Bharat Dynamics emerged as the star performer, delivering a spectacular 157% profit surge while managing 30% revenue growth, showcasing exceptional operational leverage in missile systems. Garden Reach Shipbuilders continued its strong trajectory with 37% profit growth, backed by robust execution of its Rs 22,680 crore order book. Among private players, DCX Systems impressed with 61% revenue acceleration,” said Robin Arya, smallcase Manager and Founder of GoalFi.

The disappointments, he noted were equally stark. "Mazagon Dock's profit collapse of 35% despite decent revenue growth exposed severe margin deterioration from 27.4% to 11.4%, indicating operational inefficiencies. HAL's 4% profit decline was particularly concerning given its market leadership and massive Rs 1.89 lakh crore order book, with higher pension obligations weighing on performance,” Arya added.

Anwani, however, added that the numbers don’t necessarily show poor performance for private players compared to PSUS. “The PSU order book was already very strong at the end of FY25 and has multiplied, which is now showing up in execution. For private players like Data Patterns, their order books were already strong in prior years, so relative growth looks weaker, but they still delivered decent results. The base effect also matters as order execution ramps up, growth looks stronger year-on-year for PSUs,” he explained.

Order books remain strong

HAL highlighted a pipeline of helicopter orders worth about Rs 1 lakh crore and projected an overall order book of Rs 2.5 lakh crore. BEL guided for 17–18% annual growth over the next two to three years, while shipbuilders cited strong government support, including Rs 75,000 crore earmarked for shipbuilding clusters.

“The PSU order book was already very strong at the end of FY25 and has multiplied, which is now showing up in execution. For private players like Data Patterns, their order books were already strong in prior years, so relative growth looks weaker, but they still delivered decent results,” Anwani said.

Similarly, Arya pointed out that private defence companies delivered much better in operational excellence, highlighting their superior agility and execution capabilities. “This performance gap reflects private companies' ability to adapt quickly to market demands and optimize operations without bureaucratic constraints. However, scale remains with PSUs, who command Rs 8.22 lakh crore in combined market capitalization compared to private players' Rs 20,068 crore,” he said.

Valuations remain stretched

Despite the robust fundamentals, valuations remain elevated. The Nifty Defence Index is trading at an average forward P/E of 43.7 times, compared with a peak of over 60 times in FY25, and well above long-term market norms.

HAL is trading at about 30–33 times forward earnings with a price-to-book multiple of 8.5x, which analysts see as relatively comfortable given its ₹2.5 lakh crore order book. BEL, however, commands a higher premium at 41–44 times earnings and a P/B of 13.9x, reflecting strong growth expectations but limited margin for error.

BDL trades at 105 times forward earnings with a P/B of 14.3x, making it one of the most expensive names in the sector despite its recent operational gains. Private defence electronics firms such as Data Patterns and Astra Microwave are valued in the 45–50 times earnings range, while shipbuilders like Mazagon Dock and Garden Reach, though not part of this quarter’s review, trade at 38–40 times forward earnings.

“Valuations are stretched. HAL looks relatively comfortable at around 33 times, but BEL and others are trading well above their historical averages. Execution has to be near flawless to justify these multiples,” Anwani said. Arya added: “Large-cap PSUs like HAL and BEL appear relatively reasonable given their order book visibility, while smaller companies reflect high growth expectations that may be difficult to sustain. Execution perfection is already priced in.”

Outlook and management commentary

Analysts noted that despite some short-term concerns on supply chain and tariffs, most managements remained positive. Anwani noted: “HAL management was confident about LCA deliveries and progress across programs like AMCA and unmanned systems. They highlighted a pipeline of helicopter orders worth about Rs 1 lakh crore. BEL guided for 17–18% growth for the next 2–3 years, and shipbuilding companies cited strong pipelines. The government is investing around Rs 75,000 crore in shipbuilding clusters and focusing on three pillars – indigenous components, R&D for homegrown platforms, and a robust vendor base to support manufacturing and exports.” He added that short-term risks remain supply chain–related, particularly rare-earth materials. “Some companies carry 6–7 months of inventory, so effects may show later. The situation is fluid, but the overall trajectory is positive,” he said.

Arya added that his outlook remains constructively optimistic on structural tailwinds while becoming more selective on execution capabilities. “ICRA's 15–17% FY26 revenue growth projection appears achievable given order book strength, but increasing execution differentiation favors established players with proven delivery capabilities. Current valuations demand a more nuanced approach, favoring quality franchises over broad-based exposure,” he said.

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