Defence stocks look pricey, institutions waiting for a better entry: Kotak Securities

Retail investors may be piling into defence stocks, but large institutional investors are sitting it out for now, citing stretched valuations and execution risks. Pratik Gupta, CEO and Co-Head of Institutional Equities at Kotak Securities, said the sector has strong tailwinds, but much of the upside appears priced in.

“Investors, especially institutional investors… are watching the space, but they are not, frankly, showing too much interest at these valuations,” Gupta said. He attributed the recent rally more to retail and high net-worth investor interest than institutional buying.

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While the long-term potential for India’s defence sector remains intact, Gupta pointed out that companies will need to invest significantly to scale. “There are a lot of significant investments which have to be made by these companies… not just in capex but in R&D, technology, people, and global tie-ups,” he said. Longer working capital cycles and qualification requirements for government contracts also make institutions cautious at this stage.

On the broader market, Gupta flagged a near-term risk to corporate earnings. “For the Nifty, we are projecting only about a 12% earnings growth in FY26 and about 14-15% for FY27,” he said, adding that this is an improvement over FY25, but not particularly exciting given that valuations are already at 22 times one-year forward earnings.

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Despite short-term caution, Gupta remains constructive on India’s outlook, especially in sectors like financials, telecom, logistics, and hotels. “India is still in a relatively sweet spot given our strong macro environment,” he said, but advised sticking with domestically focused stories and waiting for better entry points in overheated segments like defence.