FIIs Trim Stakes in Defence Stocks in Q2: Is It Profit Booking or a Valuation Check?

The defence sector, which has enjoyed a strong rally in recent months driven by geopolitical tensions and robust order flows, is now witnessing a pause. As the September quarter ended, one notable trend emerged clearly: foreign institutional investors (FIIs) have trimmed their holdings across most major defence stocks. This shift has sparked fresh debate in the market about whether the sector’s valuations have become stretched or if the long-term growth narrative still stands solid.

FIIs Cut Exposure After a Strong Rally

Over the past month, defence stocks have cooled off after a sharp and extended rally. Despite the sector delivering a largely in-line performance in the September quarter, FII activity indicated a cautious turn, with stake reductions reported across several defence counters.

Market watchers point out that the broader defence theme has seen accelerated price appreciation due to heightened geopolitical tensions, consistent government spending, and strong execution by PSU defence companies such as Bharat Electronics Ltd (BEL) and Hindustan Aeronautics Ltd (HAL). Against this backdrop, the recent FII trimming has naturally raised questions among investors about the sustainability of valuations.

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Profit Booking, Not Weak Sentiment, Say Experts

According to market expert Sunil Subramaniam, the FII pullback is not a sign of eroding confidence. Instead, he believes the move is primarily driven by plain profit-taking following an extended rally.

“FIIs reducing their weightage in defence does not signal any negative sentiment,” Subramaniam said. “It’s simply profit-booking and sectoral rotation. Recently, FIIs have moved towards IT and consumer discretionary, which explains the temporary cut in defence positions.”

His view suggests that the shift is tactical rather than fundamental, driven by near-term market dynamics rather than long-term sectoral concerns.

Analysts Flag Expensive Valuations in Select Defence Stocks

Another perspective comes from Amit Anwani, Senior Research Analyst at Prabhudas Lilladher, who agrees that the sector remains fundamentally sound but highlights valuation concerns in pockets.

He notes that the sector currently factors in 13–15% CAGR growth expectations over the next three to four years, yet several stocks are trading at valuation levels that far exceed these forecasts.

A key example he cites is BEL, which trades at 39x FY27 earnings and 44x FY28 earnings. Anwani believes these multiples leave limited long-term upside, reflecting stretched valuations relative to the growth profile.

In contrast, HAL remains his preferred pick. The company’s sizable and sustained order book continues to strengthen long-term visibility, which keeps HAL better positioned among its peers. HAL trades at 34x FY27 earnings and 31x FY28 earnings, making it comparatively more reasonable within the premium defence basket.

Stable Execution and Guidance Amid Market Caution

Despite the recent cooling in stock prices and FII flows, most major defence PSUs reported steady operational performance for the September quarter. Companies have reaffirmed their guidance, indicating confidence in execution, revenue visibility, and the continuity of order flows.

Even though valuations for certain names appear elevated, analysts maintain that the sector’s long-term structural story remains intact, supported by domestic defence manufacturing policies and strong order pipelines.

The near-term pause, according to both experts, appears to be more of a valuation retest following a sharp run-up rather than a shift in fundamentals.

Conclusion

FIIs reducing their stake in defence stocks during Q2 have revived conversations around valuation sustainability. While some stocks are indeed trading at premium multiples, analysts and market experts largely view the move as profit-booking and sector rotation rather than a bearish signal. With strong order books, stable execution, and reaffirmed guidance, the core fundamentals of defence PSUs like BEL and HAL continue to underpin long-term investor confidence.

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