Defence stocks are sizzling, but there's no firepower

Defence stocks have gone ballistic in the past month. As geopolitical tensions flared between India and Pakistan following Operation Sindoor, investors, anticipating a ramp-up in government spending on military modernisation, rushed to grab shares of defence manufacturers. Paras Defence is up 32 per cent, Ideaforge 31 per cent, and Data Patterns 27 per cent in just one month. Explosive rally Company 1-month returns (%) Paras Defence 32 Data Patterns 27 Cochin Shipyard 5 DCX Systems 24 Mazagon Dock 10 Bharat Dynamics 11 Hindustan Aeronautics 6 Bharat Electronics 9 MTAR Tech 7 Ideaforge 31 Data as of May 12, 2025 Such rallies are not a first. The sector, in recent years, has been on the upswing. The recent conflict is sparking renewed interest in hopes that it will keep orders and revenue growth flourishing. However, the optimism may not hold up if the past is anything to go by. The rally has mostly been driven by sentiment overshooting reality. And when you heed other risks, the current euphoria further seems overdone. Here's why: The reality of past gains Here's the truth about the stellar returns of recent years—they have mainly been driven by P/E re-rating rather than earnings growth. A look at the industry's gains over the past five years reveals that much of the share price appreciation has come from rising valuations, not matching business performance. Take Bharat Dynamics and Cochin Shipyard , for example; their stock prices have surged more than 13 times each, but their earnings per share (EPS) grew only 1.2 and 1.4 times, respectively. This indicates that investors assigned a steep premium to these businesses over time, possibly anticipating future growth, but earnings haven't kept pace. This means if prices remain ahead of profit growth, all these gains can erode. Prices mount while EPS lags 5-year growth (in times) Company Share price EPS P/E Zen Technologies 38.2 3.6 10.6 Hindustan Aeronautics 17.5 3.0 5.8 Solar Industries 15.5