Defence Giants Defy Gravity: PSU Majors Soar in Q1FY26 Amidst Valuation Alarms

The Indian defence sector, a cornerstone of national security and economic ambition, witnessed a fascinating dynamic in the first quarter of Fiscal Year 2026. While the broader industry experienced a relatively 'soft' period, it was the formidable Public Sector Undertaking (PSU) defence giants that undeniably steered the ship, driving earnings with remarkable resilience.

Their robust performance underscores the government's continued thrust on indigenous manufacturing and defence modernization, translating into substantial order books and execution.

However, this stellar show by PSU majors like Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL) is not without its caveats.

Beneath the glittering headline numbers, a chorus of caution from market analysts grows louder. Despite strong order inflows and projected growth, the valuations of these defence stocks have reached unprecedented heights. Analysts are increasingly flagging concerns that current price levels may not fully align with underlying fundamentals, even considering their long-term growth prospects.

The outperformance of PSU defence entities can be attributed to several factors.

A consistent pipeline of orders from the Ministry of Defence, coupled with an increasing focus on 'Make in India' initiatives, provides a stable and predictable revenue stream. Furthermore, their established infrastructure, skilled workforce, and strategic importance to national security offer a degree of insulation from the volatility that often plagues private sector counterparts.

Many of these companies have also demonstrated improved operational efficiencies and project execution capabilities, translating into healthier margins in the latest quarter.

Yet, the enthusiasm is tempered by the valuation debate. Investing in defence stocks today means paying a premium, with many trading at significant price-to-earnings (P/E) multiples compared to historical averages or even broader market indices.

This elevated valuation often discounts future growth well in advance, leaving less room for upside and increasing vulnerability to any unforeseen negative developments or slower-than-expected order execution. While long-term investors might still find merit in their strategic positioning and guaranteed demand, short-term traders and cautious investors are grappling with the potential for corrections.

Going forward, the market will closely watch two key aspects: the continued flow of high-value defence contracts and the sustainability of these high valuations.

The government's ambitious defence expenditure plans and focus on self-reliance are undoubtedly strong tailwinds. However, the onus will be on these PSU majors to consistently deliver on their large order books, maintain profitability, and perhaps most importantly, justify their premium valuations through consistent earnings growth and strategic diversification.

The Q1FY26 results serve as a powerful reminder of their market dominance, but also a stark warning of the risks inherent in an overheated sector where future growth might already be priced in.