The Great Defence Re-Rating: Is Market Predictability Worth the Premium?

For years, defence companies in India were treated like event-driven trades. Whenever a budget announcement came through, optimism followed. When a new contract was signed, stocks would move. And then, just as quickly, momentum would fade.

In other words, defence was important, but it wasn’t dependable. As a result, these companies were rarely seen as portfolio cornerstones. They were tactical plays, not long-term compounders.

However, that perception is changing in 2026. And interestingly, it’s not because growth has suddenly exploded. Rather, it’s because growth has become visible.

In fact, the real shift isn’t geopolitical; it’s psychological. Defence has quietly moved from being a policy story to becoming a duration story.

Markets Don’t Just Reward Growth. They Reward Predictable Growth.

Historically, defence PSUs traded at conservative multiples. Even though return ratios were healthy, valuations remained modest over a 7-year period.

Stocks	Historical P/E (7 years)	Stock P/E
HAL	14.2	32.8
BEL	24.9	53.6
Solar	56.4	83.6

This is a structural re-rating. Such expansion cannot be explained by earnings growth alone. It reflects a meaningful shift in how the market perceives risk. Earlier, these companies were valued conservatively because earnings were seen as policy-dependent, execution-sensitive, and uneven. As a result, investors demanded a higher risk premium.

What has changed in 2026 is visibility. Multi-year order books, scheduled deliveries, milestone-linked payments, and strong balance sheets have made earnings appear more predictable. When predictability improves, the required risk premium falls, and when the risk premium falls, multiples expand. However, this premium now carries expectations. If order visibility weakens or execution credibility falters, the same valuations can compress just as quickly. In essence, the re-rating reflects belief, and its durability will determine whether these multiples hold.

When Revenue Is Scheduled, Risk Compresses

Company	ROE	Operating Margin (5Y Avg)
HAL	26.1%	27.1%
BEL	29.2%	24.7%
Solar	32.6%	22.6%

HAL’s five-year-plus order visibility, combined with strong returns and minimal leverage, reflects execution strength rather than policy dependency. BEL’s consistent margins and diversified multi-year contracts add stability, while Solar Industries benefits from replenishment-driven ammunition demand and expanding exports. Together, these metrics signal durable earnings quality rather than opportunistic spikes.

That distinction matters. As earnings visibility improves and balance sheets remain strong, perceived risk declines. And when risk declines, valuation multiples expand. This is not just growth; it is confidence in the sustainability of that growth, which ultimately drives the 2026 re-rating.

But Here’s the Hard Question: Is the Premium Justified?

A shift from roughly 14x to over 30x earnings is not incremental; it reflects a fundamental change in how the market views risk and durability. In essence, the market is saying these businesses are structurally less risky than before. But that conviction must withstand scrutiny.

If growth moderates to 12-15% annually, can 35-40x multiples hold? If order inflows slow or execution delays emerge, will they still be treated as duration assets? Valuation is not a reward for past performance; it is a forward-looking commitment. Elevated multiples assume sustained order visibility, disciplined execution, stable margins, and structurally strong defence spending. Should any of these weaken, multiples can compress as quickly as they expanded. The defence story in 2026, therefore, is no longer about finding growth; it is about proving durability.

Structural Shift or Temporary Cycle?

This brings us to the bigger debate. Are we witnessing a short-term geopolitical phase, or are we entering a structural realignment?

On one hand, India’s increasing focus on indigenisation, export expansion, and long-term procurement planning suggests durability. Policy direction appears aligned with building domestic defence capacity over the long run.

On the other hand, if current enthusiasm is largely driven by temporary geopolitical stress, today’s valuations may already reflect peak optimism. The distinction is critical. Paying 35× earnings only makes sense if predictability itself is durable.

The Real Shift in 2026

Ultimately, the biggest change isn’t just in defence budgets. It’s in how investors are classifying these businesses. They are no longer being valued as event-driven PSUs. Instead, they are being valued as visibility-driven compounders.

In a market where IT depends on global tech spending cycles, banks depend on credit expansion, and consumer companies depend on demand sentiment, defence depends on national security. And national security rarely gets postponed.

As predictability becomes scarce in other sectors, it becomes valuable. And when something becomes scarce, it commands a premium.

That’s why defence in 2026 isn’t simply a rally. It’s a re-rating story. However, more importantly, it’s a test. The market is paying for certainty. Now the companies must continue delivering it.

Disclaimer: This content is for educational purposes only; please conduct personal research and consult a qualified investment advisor before making any investment decisions.

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