Defence sector firms' stocks run out of ammunition

Higher valuations, lower earnings see stocks decline by 40% from 52-week high; analyst says long-term investors need not worry

- ARSHAD KHAN

DEFENCE stocks, one of the most demanded assets in the multi-year bull run in recent years, have come under selling pressure, with most components falling 20-30% from their July 2024 highs as the latest reported earnings are unable to justify their sky-soaring valuations.

Market analysts believe that the short-term party may be over due to disappointing earnings and valuations run over and above its fundamentals.

"The peaked-out valuations were a matter of concern as the price-to-earnings multiple of many defence companies started trading higher when compared to the five-year average earnings multiple and Q1 disappointing earnings added fuel to the corrections," said Prashanth Tapse, senior vice president (Research), Mehta Equities.

Tapse added that the room is still open for some more price corrections based on fundamental theories.

He, however, also said longterm investors need not worry as the outlook remains optimistic considering the government's focus on defence as a strategic sector for domestic needs as well as focus on export opportunities.