Defence stocks rally up to 11% amid India-Pakistan tensions: What should investors do?

Defence stocks in India rallied between 5% to 11.5% on April 28, due to growing India-Pakistan tensions and the anticipated announcement of the Rafale-M fighter aircraft agreement.Several defence-related companies, including Paras Defence, Garden Reach Shipbuilders, Data Patterns, Cochin Shipyard, Mazagon Dock Shipbuilders, and Hindustan Aeronautics, registered substantial gains. The increase coincides with ongoing tensions at the Line of Control (LoC) after the Pahalgam terror incident, with multiple ceasefire breaches reported during the weekend.India has implemented various countermeasures, including the suspension of the Indus Water Treaty, cessation of Wagah Border activities, and instructions for Pakistani citizens to depart. Defence stocks have gained additional attention as India and France prepare to officially confirm the Rs 63,000 crore agreement for 26 Rafale-M fighter jets. Initial deliveries are anticipated in roughly three-and-a-half years, with the entire contract completion planned within six-and-a-half years.Paras Defence led the Nifty India Defence index with an 11.5% increase. Data Patterns, Cochin Shipyard, and Bharat Dynamics showed gains of 9.6%, 7%, and 6% respectively. Hindustan Aeronautics increased by 5%. The Nifty India Defence index demonstrated an overall increase exceeding 4%.Experts indicate that firms demonstrating sound financial health, effective implementation capabilities and compatibility with India's defence priorities are positioned for success, according to an ET report."We believe that a government effort to indigenous defence manufacturing is likely to bear fruits for the domestic companies over medium to long term," said Atish Matlawala, Sr Fundamental Analyst at SSJ Finance & Securities."We like BEL, Mazagon dock and shipbuilders and Bharat Dynamics Ltd as these companies have strong orderbook, reasonable valuations and more importantly does not depend on foreign collaboration for technology transfer as in the case of HAL," he said.What should you do with defence stocks?Experts indicate that Pakistan-related tensions are short-lived without substantial changes warranting immediate investment. Existing investors may retain holdings, whilst prospective investors should await better entry opportunities or clearer developments say experts, according to the ET report.For long-term investments, Matlawala recommends BEL, Mazagon Dock and Shipbuilders, and Bharat Dynamics, citing their robust order books, fair valuations and independence from foreign technology transfers, unlike HAL.BEL maintains leadership in defence electronics and radar systems, benefitting from increased investments in surveillance, communication and electronic warfare systems. The company currently shows a P/E ratio of 43x with EV/EBITDA of 30x.Paras Defence contributes significantly to force multiplication and threat reduction in counter-terrorism and cross-border operations through enhanced situational awareness and intelligence capabilities. The company presently trades at P/E of 84x with EV/EBITDA of 48x.Atul Parakh, CEO of Bigul offers an alternative perspective: "Current valuations appear more reasonable after the correction, with the sector trading at a slight discount to its recent premium levels."(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)