Paras Defence Q2 FY26: Robust Profit Growth Masks Premium Valuation Concerns

The ₹6,157-crore market capitalisation company, which operates in the high-growth aerospace and defence sector, has seen its stock price rally 55.71% over the past year, significantly outperforming the Sensex's 8.46% gain during the same period. Trading at ₹764.00 as of November 14, 2025, the stock has surged 6.23% in a single day, reflecting strong investor appetite despite the company's stretched valuation metrics.

The quarterly results reveal a company firing on multiple cylinders operationally, with revenue growth accelerating and margins expanding. Net sales for Q2 FY26 reached ₹105.72 crores, representing a sequential increase of 13.45% from Q1 FY26's ₹93.19 crores and a robust year-on-year expansion of 21.39% from ₹87.09 crores in Q2 FY25. This marks the highest quarterly revenue in the company's recent history, surpassing even the seasonally strong Q4 FY25 figure of ₹108.23 crores.

Financial Performance: Margin Expansion Drives Bottom-Line Growth

The standout feature of Q2 FY26 results was the significant margin expansion across the board. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) surged to ₹29.69 crores, the highest quarterly figure on record, translating to an operating margin of 28.08%. This represents a substantial improvement from Q1 FY26's 23.55% and compares favourably with the 26.12% achieved in the year-ago quarter.

The margin improvement was driven by operating leverage benefits as revenue scaled, with employee costs remaining relatively stable at ₹11.07 crores in Q2 FY26 compared to ₹11.54 crores in the previous quarter. This disciplined cost management, combined with revenue growth, allowed the company to extract better profitability from each rupee of sales. Profit after tax (PAT) margin expanded to 18.41% in Q2 FY26, up from 15.31% in Q1 FY26 and 14.58% in Q2 FY25.

Interest costs declined to ₹1.20 crores in Q2 FY26 from ₹2.56 crores in Q2 FY25, reflecting the company's improving financial structure and reduced debt burden. The company's net debt to equity ratio stands at a negative 0.14, indicating it is a net cash company—a significant strength in the current environment. Depreciation remained steady at ₹4.19 crores, whilst the effective tax rate of 26.79% was in line with the previous quarter's 26.63%.

On a half-yearly basis (H1 FY26), the company reported consolidated net profit of ₹35.51 crores on revenue of ₹198.91 crores, representing year-on-year growth of 23.54% and 16.30% respectively. This sustained momentum across the first two quarters of FY26 demonstrates the underlying strength of the business model and order book execution.

Balance Sheet Strength: Zero Debt and Growing Reserves

Paras Defence's balance sheet continues to strengthen, with shareholder funds reaching ₹639.94 crores as of March 2025, up from ₹444.61 crores a year earlier. This ₹195-crore increase was driven primarily by retained earnings, with reserves and surplus expanding to ₹599.65 crores from ₹405.61 crores. The company maintains minimal long-term debt of just ₹0.88 crores, down from ₹1.43 crores in the previous year.

Return on equity (ROE) improved to 9.92% in the latest fiscal year, up from the five-year average of 8.25%, though this remains below the peer group average of approximately 10%. The company's return on capital employed (ROCE) stood at 14.88% for the latest year, compared to the five-year average of 11.92%. Whilst these returns show an improving trend, they remain modest relative to the premium valuation multiples the stock commands.

Fixed assets increased to ₹189.57 crores from ₹185.70 crores, reflecting ongoing capital expenditure to support capacity expansion. Current assets surged to ₹598.43 crores from ₹401.03 crores, driven by higher receivables and inventory levels as the business scales. The company's book value per share stands at ₹74.22, which when compared to the current market price of ₹764.00, results in a price-to-book ratio of 9.06 times—amongst the highest in the peer group.

Operating Efficiency: Strong Cash Generation Despite Working Capital Build-Up

Cash flow from operations for FY25 stood at ₹44.00 crores, a significant turnaround from the negative ₹45.00 crores in FY24. This improvement came despite a ₹41-crore increase in working capital requirements, indicating robust underlying cash generation from core operations. Profit before tax of ₹83.00 crores, adjusted for non-cash items of ₹21.00 crores, provided the foundation for this cash generation.

The company deployed ₹87.00 crores in investing activities during FY25, primarily towards capital expenditure and investments, up substantially from just ₹1.00 crore in the previous year. This aggressive investment posture signals management's confidence in future growth opportunities. Cash flow from financing activities contributed ₹73.00 crores, resulting in a net cash inflow of ₹31.00 crores for the year. Closing cash and equivalents improved to ₹34.00 crores from ₹2.00 crores, providing a comfortable liquidity cushion.

Peer Comparison: Premium Valuation Despite Below-Average Returns

When benchmarked against aerospace and defence peers, Paras Defence's valuation appears stretched relative to its operational metrics. The company trades at a price-to-earnings ratio of 91.29 times trailing twelve-month earnings, substantially higher than Zen Technologies' 50.04 times and Astra Microwave's 59.33 times, though below MTAR Technologies' 177.36 times and Apollo Micro Systems' 114.55 times.

More concerning is the company's ROE of 8.25% (five-year average), which lags behind most peers. Zen Technologies and Mishra Dhatu Nigam both report ROE above 11%, whilst MTAR Technologies delivers 10.28%. Only Apollo Micro Systems, with an ROE of 5.82%, trails Paras Defence in this critical profitability metric. The company's price-to-book ratio of 9.06 times is also amongst the highest in the peer set, exceeded only by MTAR Technologies at 10.66 times.

The valuation premium appears to be driven by growth expectations rather than current profitability metrics. Paras Defence has demonstrated a five-year sales compound annual growth rate (CAGR) of 23.27%, which is robust and justifies some premium. However, the EBIT growth over the same period of 18.11% suggests that this revenue expansion has not translated proportionately into profit growth, raising questions about operating leverage and scalability.

Valuation Analysis: Stretched Multiples Limit Upside Potential

At the current price of ₹764.00, Paras Defence trades at a significant premium across all valuation metrics. The P/E ratio of 91 times compares unfavourably to the industry average of 48 times, representing a near-90% premium to sector peers. The enterprise value to EBITDA multiple of 60.07 times and EV to EBIT of 71.56 times are also elevated, suggesting limited margin of safety at current levels.

The company's PEG ratio of 1.82 indicates that whilst growth prospects are being factored in, the valuation may have run ahead of fundamentals. Typically, a PEG ratio above 1.5 suggests that a stock may be overvalued relative to its growth rate. With earnings growth expected to moderate from the exceptional levels seen in recent quarters, the current multiple appears difficult to justify on a medium-term basis.

The stock has appreciated 55.71% over the past year, significantly outpacing both the Sensex and the aerospace and defence sector index, which returned 49.16%. This outperformance has been driven by strong order inflows and execution, but has also pushed valuation multiples to stretched levels. The stock currently trades 21.38% below its 52-week high of ₹971.80, but remains 90.52% above its 52-week low of ₹401.00.

The company's overall valuation grade remains "Very Expensive" according to proprietary metrics, a classification it has held since November 2021. This suggests that whilst the business quality and growth prospects are acknowledged, the price being paid by investors leaves limited room for error or disappointment in execution.

Stock Performance: Strong Momentum Across All Timeframes

Paras Defence has delivered exceptional returns across multiple timeframes, consistently outperforming both the broader market and its sector peers. The stock's one-year return of 55.71% translates to an alpha of 47.25 percentage points over the Sensex, whilst the three-year return of 140.88% represents an alpha of 104.34 percentage points—a remarkable outperformance that reflects both the company's operational improvements and the sector's structural tailwinds.

The stock's technical positioning remains favourable, trading above all key moving averages including the 5-day, 20-day, 50-day, 100-day, and 200-day averages. The overall technical trend is classified as "Mildly Bullish" as of September 30, 2025, following a change from "Sideways" at ₹670.70. Weekly and monthly KST indicators show bullish signals, whilst on-balance volume (OBV) indicators suggest mildly bullish momentum across both timeframes.

However, the stock's high beta of 1.35 indicates significantly higher volatility than the broader market, with annualised volatility of 53.22% compared to the Sensex's 12.26%. This high-risk, high-return profile means that whilst the stock has delivered exceptional gains during bullish phases, it is equally susceptible to sharp corrections during market downturns or company-specific disappointments.

Investment Thesis: Quality Business at Expensive Valuation

Paras Defence presents a mixed investment proposition. On one hand, the company operates in a structurally attractive sector with strong government support and rising defence budgets. The operational performance has been impressive, with consistent revenue growth, expanding margins, and improving cash generation. The debt-free balance sheet provides financial flexibility, and the company has demonstrated execution capabilities through its order book conversion.

On the other hand, the valuation appears stretched across all metrics. At 91 times trailing earnings and 9.06 times book value, investors are paying a significant premium for a company with modest returns on equity and capital. The five-year average ROE of 8.25% and ROCE of 11.92% suggest that capital efficiency remains a work in progress, even as the company scales operations.

The company's proprietary advisory score of 57 out of 100 places it firmly in "HOLD" territory, suggesting that whilst the business fundamentals are sound, the current valuation leaves limited margin of safety for fresh investors. The score reflects the tension between positive operational trends and expensive valuation multiples.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The defence sector remains well-positioned for sustained growth given India's strategic imperatives and the government's push for self-reliance through the "Make in India" initiative. However, individual company performance will vary based on execution capabilities, technological differentiation, and capital allocation discipline. For Paras Defence, the key will be translating revenue growth into improved capital efficiency whilst maintaining the margin profile.