Defence stocks like Mazagon Dock, HAL, Paras Defence may fall up to 20%, says Nirmal Bang

Shares of Hindustan Aeronautics have already declined nearly 10% in the last two trading sessions, while those of Mazagon Dock and peers have also corrected from record high levels.

Nirmal Bang wrote in its note that defence stocks within its coverage universe has delivered 58% returns in the last three months, 75% in the last six and 776% returns in the last three years led by healthy order books, revenue expansion and the government’s major indigenisation push within the sector.

“We believe that the exuberance around the Defence sector has been built solely around strong order books for assigning high valuations. Therefore, the conventional financial metrics do not fully capture the industry’s true value, particularly cyclicality, profitability and efficiency,” Nirmal Bang wrote in its note.

Although the brokerage remains structurally positive on the sector, the current steep valuations do not take into account the risks from a rise in raw material costs, competitive pressures, execution worries and cash flow generation, the note said.

Despite assuming the extremely strong earnings growth, Nirmal Bang said that it finds it difficult to justify the exorbitant multiples as the Return on Equity (RoE) multiples for financial year 2026 remain between 10% and 30% for the stocks under its coverage.

“We therefore downgrade the Defence sector to SELL and prefer to remain on the sidelines until valuations return to reasonable levels,” the brokerage wrote.

Changes in the global economic and political order, delays in project execution caused by technical complexities and bureaucratic hurdles, changes in government policies and geopolitical uncertainties are some of the key risks for the sector.

The change in political order was something highlighted by Chris Wood of Jefferies as well over the weekend when he spoke at the CNBC-TV18 Market Townhall exclusively. He highlighted that if Donald Trump is voted back to power later this year, it may lead to a resolution of the Russia-Ukraine conflict and that may lead to some correction in defence stocks.

Nirmal Bang also believes that a disruption in cash flows and profitability will lead to a fall in the prices of these stocks.