The NSE Nifty India Defence has been the best-performing sectoral index on year-to-date basis. However, for two months in a row the index declined as most of its constituents fell sharply from their 52-week highs, scaled most in June and early July.
As of Thursday's settling level, the Nifty India Defence index slumped 21% from its 52-week high level of 9,195. Its highest weighted stocks Hindustan Aeronautics Ltd. and Bharat Electronics Ltd. have fallen 16% and 17% from their respective 52-week high levels.
Cochin Shipyard Ltd. and Ideaforge Technology shares were the worst hit in this consolidation phase.
Below are listed reasons what actually caused a dampener on defence stocks rally.
Soft Q1 Results
Weakness in first-quarter results in most defence and defence manufacturing company weighed on the stock prices. In fact, the consolidation started from the first-quarter earnings release in July.
Hindustan Aeronautics Ltd. reported that its net profit declined 4.1% on the year to Rs 1,377 crore.
Mazagon Dock Shipbuilders Ltd., and Data Patterns (India) Ltd. missed estimates for the period April–June. Although Cochin Shipyard Ltd. reported good numbers but its profit margin narrowed.
Execution Challenges
Defence companies have built a healthy order book as most fetched back-to-back good orders from both private and public-sector entities. However, execution remained a challenge.
"These companies have order book almost three-times their annual turnover. But the problem is that execution is not there. The reason is that they do not have that kind of capacity. So, they are building on it," said research analyst Tapan Doshi.
Supply chain constrains also created problems for defence companies to execute the order book.
Geopolitical Situation
There is a shift in geopolitical situation since the meeting between US President Donald Trump and Russian counterpart Vladimir Putin. There will likely be a possible peace in the four-year long war between Russia and Ukraine.
India's geopolitical situation has improved since the horrifying terrorist attack in late April. The defence stocks got a boost when the Government of India conducted Operation Sindoor.
India is not only able to come to ceasefire with Pakistan but also thawing the diplomatic frost with China. Hence, the fundamental triggers are off for defence stocks.
Outlook
Analysts expect a near-term consolidation. Second-quarter earnings will be in focus. Doshi expects earnings revival from third quarter which will again act as a trigger for these stocks.
Hindustan Aeronautics and Bharat Electronics Ltd. remained top choices in the sector.
Hindustan Aeronautics is currently trading in a wide range of Rs 4,360–5,156 but is showing signs of weakness. A decisive close below Rs 4,360 will confirm a bearish breakdown, opening downside potential towards Rs 3,820 in the near term, said Anshul Jain, head, research at Lakshmishree.
On the other hand, Bharat Dynamics Ltd. has already broken key supports at Rs 1,800 and Rs 1,572, showing strong bearish momentum, Jain said.
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