Defence allocation
Post US-Israel-Iran war, it seems like countries are going to look after their own back and spend on defence. India has already been spending quite a lot on defence and the valuations of this sector are already rich. Considering this, do you think the defence sector has long term investment potential? If so, how much can an investor allocate to defence on his/her portoflio?
Defence as a long-term theme (for India) does have merit.
Geopolitical tensions, import restrictions, rising defence budgets, exports, need for defence upgrades (on drones, electronics, missiles, naval systems), and maintenance spending can support growth for many years.
India also wants higher local manufacturing, which creates opportunity.
So the sector is investable in principle.
But a good theme does not always mean good returns if you overpay for stocks.
That said, valuations in many Indian defence names have already priced in years of strong growth.
Moreover, I think, we investors should separate true technology-led businesses from companies that mainly fabricate, assemble, or execute contracts with limited intellectual property.
Businesses with strong R&D, recurring maintenance revenue, export competitiveness, balance-sheet strength, and execution discipline deserve better multiples than pure job-work manufacturers depending only on government orders.
For portfolio allocation, I would treat defence as a supporting theme, not the core of my portfolio.
For most long-term investors, around 5% allocation will be sensible I think.
Aggressive investors who understand defence and are also aware of the valuations may stretch to 10%. But I’ll be very skeptical of this sector now simply because of its valuation and order concentration.
If I buy, I’ll prefer staggered buying only during corrections. HAL and BEL are two quality names that have been in talks in all news for the last couple of years. Mutual Funds and Portfolio managers need to buy them to show their exposure to the defence theme. But I’m not sure if they would buy these same stocks now had it been their own personal portfolio. I’ll not buy. I’d rather go and buy another stock that may not have the same kind of order visibility like defence but may have similar growth and better valuations.
Disclaimer: This content is for informational purposes only and should not be considered investment advice.
