Defence Stocks Slide Up to 6% After Weak Q1 Earnings; Valuation Concerns, Booking Pressure Drag Sector Lower

Indian defence stocks came under pressure on Thursday, with frontline companies witnessing sharp declines of up to 6%, triggered by disappointing Q1 earnings and heavy profit booking after a strong rally in the first half of 2025. The correction signals a shift in investor sentiment amid stretched valuations and cautious forward guidance.

Q1 Earnings Miss Spark Widespread Sell-Off

Leading the fall was Mazagon Dock Shipbuilders, which reported a 35% drop in consolidated net profit to ₹452 crore for Q1FY26. The company’s operating margin also contracted year-on-year, denting investor confidence. Shares of Mazagon Dock closed nearly 5% lower.

Other notable laggards included Paras Defence, DCX Systems, Bharat Dynamics Ltd (BDL), and Solar Industries, all of which ended down between 3–5%. Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) also saw modest declines of around 2%.

The Nifty Defence Index declined by 2%, extending its three-day losing streak as investors weighed the earnings disappointment against lofty stock valuations.

Sector Coming Off Highs After Multi-Quarter Rally

The sharp correction comes after a robust rally of over 40% in the defence index from December 2024 to June 2025, driven by strong order flows, heightened national security spending, and strategic policy tailwinds such as import substitution and Make in India programmes.

However, with global geopolitical tensions stabilising and domestic demand growth plateauing, analysts suggest the sector may now be entering a consolidation phase.

“Many defence stocks had run up considerably, pricing in aggressive earnings growth and large-scale orders. But the Q1 numbers suggest this growth may take longer to materialise,” said an analyst at a Mumbai-based institutional brokerage. “The market is recalibrating expectations.”

What to Watch Going Ahead

Despite the near-term dip, the structural story for India’s defence sector remains intact, supported by policy backing and rising defence budgets. That said, stock selection is likely to become more earnings-dependent, with investors shifting focus to execution timelines, order backlogs, and margins.

Some fund managers are advising clients to stay invested but moderate exposure, especially in mid-cap names with thin liquidity. Others are awaiting clarity from management commentary in upcoming AGMs and investor calls.