ETMarkets Smart Talk: Defence stocks may face bumpy ride despite big potential, says Asit Bhandarkar
There may also be opportunities to turnaround in sectors where either fundamentals and valuations or both have bottomed out.
JM Financial's Asit Bhandarkar advises caution on defence stocks despite long-term potential, citing long execution cycles and potential volatility. He highlights India's sweet spot with strong finances and growth amid US bond yield concerns. Bhandarkar also notes attractive opportunities in corrected markets, focusing on financialization, consumption, and manufacturing themes for long-term investors.
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As geopolitical tensions rise and investor interest in defence stocks surges, JM Financial Asset Management's Senior Fund Manager – Equity, Asit Bhandarkar, urges caution.In an exclusive conversation with ETMarkets Smart Talk, Bhandarkar acknowledges the long-term potential of India's defence sector, especially with increasing private sector participation and innovation around drones and modern warfare.However, he warns that execution cycles may be long and initial investor euphoria could face unexpected challenges, making the investment journey in defence stocks uncertain and volatile in the short term. Edited Excerpts –A) Tariffs are a developing story. Although it led to significant volatility in the first quarter of the calendar year, as things stand, markets have figured that perhaps, the tariffs in their final form may not be as negative in their quantum as initially feared.The Indian government as well as corporates are attempting to convert this challenge into an opportunity to strengthen our exports to the US and capitalise on the China plus sentiment.A) Drones have higher impact than expensive military aircrafts and is a classic sign of high disruption ahead. Fundamentally, war strategies are getting redefined. New wave of innovation and imagination will drive the future outlook here.From a stock market perspective, popular stories seldom make money in the short term. We feel that execution cycles will be long and initial euphoria may face unexpected challenges making the journey uncertain and volatile.That said we are positively inclined about the role of the private sector participation in development, production and even export of defence equipment.A) US bond yield strengthening have had their unique dimensions this time around given the outlook on US inflation, the deficits that the US government has been running as well as the uncertainty on growth created by the tariff announcements.That said, we are yet to see a closure of the tariff situation. Lowering of uncertainties on that front can clearly reduce the risk premium on the yields.That said, it's likely that capital in US may be looking to diversify given the unprecedented uncertainties presented by the tariff related uncertainties leading to a prolonged weak growth outlook.Spreads between India and US yields are at their lowest in recent times but India is in a sweet spot in terms of strong government finances, benign inflation and improving growth outlook.It is indeed likely that flows continue to move towards geographies with higher growth and lower uncertainties. India definitely shines on that front.A) As the portfolios bore the brunt of the volatility driven by the tariff announcements, we did have to restructure our portfolios to maximise sectoral overlap with the benchmark as well as increase liquidity as a risk management measure, in case we got into a long drawn correction.Sectors like BFSI , which have been suffering anemic growth, managed to outperform as regulatory tailwinds kicked along with FII inflows.As things stand, broader markets have sharply corrected from their peak last year while macros have steadily improved with ample liquidity, lower rates and improving corporate growth.We are now in a position to add newer stocks across market caps, thanks to attractive opportunities thrown up by the sharp correction in prices and stability in market conditions. Market is starting to focus on growth stocks again.A) YoY and QoQ growth rates excluding BFSI were at 10.1% and 18.2 % for S&P BSE 500 Index based on our sectoral analysis of Q4FY'25 numbers (source: ACE Equity, JMFMF Research).Sector wise Chemicals , insurance, telecom, consumer durable, retail and electricals showed a sharp improvement in operations yoy. However, large sectors like Banks, FMCG, IT and autos exhibited anaemic growth.We appear to be on the cusp of an earnings recovery into FY 2026 as we face a low earning base from last year and improving government spending, lower taxes leading to consumption uptick, improved liquidity and lower rates to push up demand as well as private capex.A) The IPO markets have cooled down versus last year. There is much lower interest and there has been a moderation of valuation expectation.From a long-term investors perspective, it may be a good time to allocate to few issues that come along as valuations might be more rational than in the previous year. SME space, which has gathered more interest so far in 2025 as compared to mainboard IPOs? Do you see froth building in this space or an opportunity for long-term investors?A) Mutual funds had mostly sidestepped the euphoria in the SME space and this shows the maturity and the discipline of investment processes at an industry level.At a price, given the sharp correction all across, there might be opportunities available. But most of the businesses in the SME market may not be at scale where mutual fund investors find the risk reward palatable.A) Financialisation, formalisation, aspiration driven consumption and a manufacturing renaissance driven by china+1 remain strong themes, driven by global geopolitics and rising per capita income back home.Most of these themes remain expensive, given the higher visibility. Sharp corrections give us an opportunity to build positions in long term structural themes at reasonable valuations.There may also be opportunities to turnaround in sectors where either fundamentals and valuations or both have bottomed out.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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If you look at the global environment that we are in, both the IMF and World Bank have cut their global growth estimate by 50 bps. In that kind of an environment if your economy is growing at 6.5%, it is still a pretty decent number. With the recent policy measure that you just mentioned by the RBI both on the monetary side as also the regulatory step that they had taken earlier, it provides a significant support to your economic growth outlook. If the credit growth revives and if the credit growth picks up, then there can be a small positive surprise on the RBI GDP growth estimates as well. In that kind of an environment, markets should do well from here onwards also, but that should broadly be in line with the corporate earnings expectations which we expect to be in a low double digit return, low double digit over next one or two years. 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Secondly, the steps that RBI has announced in so far as your unsecured loans are concerned should also help in revival of urban consumption. More importantly, in FY27, we expect central government's pay commission to come in and at the same time, one year later, maybe in FY28, some state government pay commission should come in and that should push in around Rs 2.5 lakh crore into the hands of one-and-a-half crore employees and that should provide some bit of a support to consumption. The second compounding theme is infrastructure. We think India still is very underinvested in so far as infrastructure is concerned, including power, power transmission, ports, railways, and roads. If you are planning to be a major manufacturing hub, you want to be a China plus one type of an alternative, there is no choice but to invest heavily into infrastructure. Both the central and state government's focus continues to be on that. Last year may have been an aberration. 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On the back of this, do you believe there are any sectors that need to be relooked or revisited in terms of any rerating, derating perhaps? Sumit Bhatnagar: Broadly we expect low double digit type of earnings at a largecap level over next two years. But in terms of sectors, maybe financial, both banks and NBFCs can now surprise positively. The recent RBI measure can help banks in managing the NIMs much better with a CRR cut that they have announced. You Might Also Like: Next biggest opportunity will be thrown up by manufacturing in India: Mihir Vora Plus, frontloading of the repo rate cut should help NBFCs as well. With credit growth revival, there can be earnings surprises in both these segments. Secondly, telecoms with the possibility of a tariff hike can surprise positively on earnings. Cement, we expect to do well with the prices holding up firmly and with the volume growth of 6-7%, cement can surprise on upside in so far as earnings are concerned. Consumption over the next two-three years can surprise if demand picks up. Drivers are now getting in place for demand revival, but we need to watch out for that. What is your take on metals? We believe the government is likely to hike the safeguard duty on the steel products beyond 12% and on a month-on-month basis, we are seeing domestic steel production inching higher. What will impact the steel stocks? Will it be the demand, will it be the price, or will it be supply? Sumit Bhatnagar: Our sense is that in the entire metal space, steel is one segment that should do reasonably well. Even without your government support on anti-dumping or safeguard duties, steel volumes were still growing at a pretty healthy 8-9%. And with the government's plan to hike duty to 24%, it could only reduce the cheap Chinese imports that are coming in. So, maintain a positive view on steel, but valuations also need to be looked at in steel stocks. What is your take on emerging sectors like aviation as a subsector of defence? We have already seen a significant runup in some of these defence counters. Would you still continue to be bullish on defence and also aviation in terms of drones as a subsector of defence? Sumit Bhatnagar: So far as defence is concerned, till about a month back, it used to be a narrative sector, but after the proof given in Operation Sindoor , the narrative part is over, now they can actually offer a very attractive opportunity over a medium to long term. With the kind of proof that we have seen, we do expect some bit of an inquiries or increase in inquiries for your defence platforms as well. Earlier, we used to export support consumables, but now platforms also are a fair game but that is going to take time. So, in so far as near-term is concerned, the recent rally prices in a lot of positives and space as a whole may be a fairly priced or maybe inching towards valuations as well. You Might Also Like: ETMarkets Smart Talk: Defence stocks may face bumpy ride despite big potential, says Asit Bhandarkar In so far as drones are concerned, we have seen the importance of drones in Operation Sindoor per se and even in Russia-Ukraine war. Now drones are a very effective weapon system as well. Drones have both a defence as also your industrial application. As a space, drones can do well, but unfortunately there are not many options available to play this space.
