JPMorgan Remains Bullish on Growth, Sees Opportunity in Defense Stocks After Sharp Decline

Valuation Opportunity Amid Market Correction

Defence stocks have witnessed a sharp decline from their record highs, with market prices more than halving. Analysts at JPMorgan believe that this correction has made these stocks more attractive from a valuation perspective, presenting a buying opportunity for long-term investors.

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JPMorgan analysts maintain their confidence in the structural growth of the defence sector, emphasizing that India's rising defence capital expenditure (capex) and its push for domestic manufacturing are not short-term trends but long-term growth drivers. They argue that concerns over budget constraints and geopolitical uncertainties are overstated.

"We maintain our overweight stance on Bharat Electronics Limited (BEL) and Hindustan Aeronautics Limited (HAL), with BEL as our preferred pick. Strengthening defence ties with the US will be a net positive for the domestic industry," the brokerage firm noted.

Public Sector Outperforms Private Defence Companies

During the recently concluded third quarter, analysts at Choice Broking highlighted that public sector undertakings (PSUs) in the defence sector have significantly outperformed private-sector defence companies across key financial indicators.

According to the brokerage, defence PSUs recorded a strong 25.3% year-on-year revenue growth, with EBITDA margins expanding by 40 basis points to 32.4%. Additionally, net profit surged by 28.7%, despite ongoing global conflicts causing disruptions in supply chains.

Conversely, private-sector defence firms struggled with execution delays and supply constraints. This resulted in a much lower revenue growth of 7.5% and an EBITDA margin contraction of 88.7 basis points on a year-on-year basis in the third quarter.

Significant Stock Declines in the Defence Sector

The sharp correction in defence stocks has affected multiple companies, with some experiencing declines of over 50% from their all-time highs. Data Patterns India has been the hardest hit, plummeting 57% from its peak, followed by Cochin Shipyard, which has dropped 55%. Other significant declines include Paras Defence, down 43.8%, Bharat Dynamics, which has fallen 43.7%, and Astra Microwave Products, down 42%.

While these price corrections may concern short-term investors, many analysts view them as a healthy adjustment, making valuations more reasonable and attractive for long-term investors.

Government Spending to Drive Future Growth

Looking ahead, analysts at Elara Capital anticipate a surge in order inflows in the March quarter as the government works towards achieving its defence capex target for the current fiscal year.

The brokerage firm highlighted that allocations to domestic companies currently account for 75% of the total budgeted defence capex, reinforcing the government’s commitment to self-reliance in defence production. Moreover, the Indian Navy’s budget has seen an 18% increase in the Budget Estimates for the financial year 2025 compared to the previous year, signaling continued growth in defence spending.

With the government prioritizing domestic defence manufacturing and enhancing strategic ties with global players, particularly the US, analysts expect the sector to witness sustained long-term growth despite short-term market fluctuations.

Despite recent corrections, the long-term outlook for India’s defence sector remains positive. Strong government spending, rising domestic manufacturing, and increasing global collaborations position the sector for sustained expansion. While short-term market volatility has impacted stock prices, analysts suggest that current valuations present an opportunity for investors seeking exposure to the growing defence industry.