Tonbo Imaging vs Paras Defence: Which is the better defence stock?

Until a few days ago, retail investors looking for a pure-play on India’s defence optics and optronics story had only one choice: Paras Defence and Space Technologies.

Tonbo Imaging India Ltd, which has built a global name in battlefield electro-optics, night vision, and autonomous targeting, was privately held.

That situation has changed this week.

Tonbo Imaging India opened its ₹852 crore initial public offering (IPO) from 15 to 19 October 2026, offering up to 121,74,046 equity shares with a face value of ₹2 each in a price band of ₹665-700 per share.

With India’s defence production reaching ₹109,556 crore and exports climbing to a record ₹38,424 crore in FY26, this is the right moment to compare how the two companies are positioned to capture the defence sector’s growth.

Several important details set these two companies apart.

Let's see how they stack up against each other...

Two firms riding the defence indigenization wave

India's defence modernization is receiving a massive push. In the Union Budget FY27, total defence allocation stood at ₹7.85 trillion, with over ₹2.19 trillion under the capital head.

Roughly 75% of the capital acquisition budget, amounting to ₹1.39 trillion, is reserved exclusively for domestic procurement.

Both companies operate under the high-priority IDDM (indigenously designed, developed and manufactured) category.

Interestingly, while they compete in electro-optics, Paras Defence also lists Tonbo Imaging among its private sector customers.

Where Tonbo Imaging is ahead: Tonbo’s edge is in its asset-light, IP-heavy product model and global battlefield deployment.

It designs and develops advanced imaging, sensor fusion, and autonomous fire-control systems that are non-ITAR (free from US International Traffic in Arms Regulations restrictions), allowing it to export freely to over 24 countries, including Nato members, Israel, Armenia, Spain, and the Philippines.

Unlike traditional manufacturers that spend heavily on factories, Tonbo focuses on R&D and pilot engineering in Bengaluru while outsourcing mass production to electronics manufacturing services (EMS) partners such as Kaynes Technology and Avalon Technology.

In FY26, Kaynes and Avalon manufactured almost 72% of Tonbo's total units sold.

Tonbo also spends aggressively on R&D. Its R&D expenditure rose to ₹25.86 crore (8.62% of total expenses) in FY26, backed by a 130-member engineering team.

In March 2024, it acquired full ownership of 20 intangible technologies from CEAQ Singapore for ₹183 crore, eliminating future royalty outflows.

Where Paras Defence leads: Paras Defence’s edge is its deep institutional moat within India's strategic programmes, superior order book visibility, and consistent execution.

It’s the only company in the Asia-Pacific region to manufacture submarine periscopes (producing one periscope every three months) and the only Indian private sector company developing indigenous hyperspectral space cameras and turnkey Electromagnetic Pulse (EMP) protection solutions.

It’s also pioneering high-power laser-based air defence systems.

While Tonbo’s revenue dropped 22.69% in FY26 due to West Asia war logistics delays and a high European export base in FY25, Paras Defence grew its consolidated revenue 30.69% to ₹476 crore and expanded its PAT 45.47% on-year.

Balance sheet health, working capital, and debt

Defence is notorious for long working capital cycles, and this is where the forensic details matter most.

At Tonbo Imaging, despite booking ₹123 crore in cumulative net profit across FY25 and FY26, the company burned ₹200 crore in negative operating cash flows (- ₹136 crore in FY25 and - ₹63 crore in FY26), plus another - ₹14 crore in 1QFY27.

Cash is locked in inventories and receivables. Tonbo’s working capital cycle stretched from 152 days in FY24 to 280 days in FY25, and 517 days in FY26.

Inventory jumped from ₹111 crore in FY25 to ₹319 crore by 30 June 2026, as the company stocked up on critical components and faced shipment delays from the West Asia war.

Consequently, Tonbo's short-term borrowings rose from ₹78 crore in FY25 to ₹116 crore in FY26, and ₹129 crore as of 30 June 2026.

Crucially, Tonbo’s ₹852 crore IPO is a 100% offer for sale (OFS). The company will not receive a single rupee from the IPO proceeds to pay down debt or fund its working capital.

Paras Defence raised ₹135 crore via a qualified institutions placement (QIP) in October 2024 (at ₹1,045 per pre-split share), deploying ₹120 crore directly into working capital.

This helped it cut finance costs and generate positive operating cash flows of ₹30.78 crore in FY26.

What about the valuations?

On headline multiples, Tonbo Imaging is priced at a discount to Paras Defence.

At the upper price band of ₹700 per share, Tonbo commands a post-issue market cap of ₹4,000 crore and is valued at 78.83 times its FY26 diluted EPS of ₹8.88.

On a price-to-book basis, it trades at roughly 7.25 times its FY26 net worth.

Paras Defence trades around ₹1,218–1,265 in October 2026, commanding a market cap of roughly ₹10,000 crore.

That puts Paras at a steep 105 times its FY26 earnings and over 14 times book value.

Risks and hidden landmines

Both companies carry risks that headline PE multiples do not immediately reveal:

Tonbo's customer and supplier concentration: In FY25, a single European customer accounted for 57.07% of Tonbo’s revenue. When that order was completed, and no repeat order followed in FY26, European revenues collapsed.

On the supply side, Tonbo’s top 10 suppliers accounted for 68.77% of total expenses in FY26, with heavy reliance on scarce imported Germanium and infrared detectors.

Whistleblower complaints and litigation in Tonbo's RHP: Post the filing of its December 2025 DRHP, Tonbo faced complaints sent to Sebi and the ministry of defence alleging Chinese component routing through CEAQ Singapore, predatory tender pricing, and field repair issues all of which the company has refuted.

Additionally, a minority shareholder of investor CEAQ Singapore (Harshad Ajit Lahoti) filed a suit in the Singapore High Court in October 2026, naming CEAQ Singapore, Tonbo, and its MD.

Paras Defence's related-party dependencies: Paras relies heavily on joint ventures and subsidiaries.

In its 17th AGM Notice, Paras sought shareholder approval for material related-party transactions of up to ₹450 crore with associate Controp-Paras Technologies (94% of Paras's FY26 consolidated turnover) and ₹150 crore with subsidiary Paras Anti-Drone.

Conclusion

Overall, both companies offer exposure to India's defence electronics and optics boom, although with very different risk profiles.

Paras Defence offers investors a cleaner balance sheet, positive operating cash flows, deep integration with DRDO, ISRO, and Indian naval programs, and an order book exceeding 2 years' annual revenue.

But at over 105 PE, the stock leaves no margin of safety for execution slippages.

Tonbo Imaging brings world-class, non-ITAR thermal imaging IP and high gross margins at a slightly lower PE of 78.8, but even this PE is high.

Also, its 100% OFS structure, negative operating cash flows, a 517-day working capital cycle, and a lumpy export book demand that requires close scrutiny by investors.

With its global technology moat, the onus is on Tonbo to convert its ₹310 crore order book into actual cash flows in the second half of FY27.

Evaluate each company's cash flow conversion, corporate governance, and valuations carefully before drawing any investment conclusions.

Happy investing.

This article is syndicated from Equitymaster.com