After a stupendous rally, defence stocks have crashed on concern over their high valuation amid weak earnings growth last quarter.
The Nifty India Defence index fell 19 per cent to 6,707 points from a high of 8,302 points in July. Most of the 15 stocks of Nifty India Defence index have registered a double digit fall from their 52-week highs.
Cochin Shipyard has fallen 40 per cent to ₹1,797 on Tuesday from its peak of ₹2,977 in July. Similarly, share price of Garden Reach Shipyard and Ideaforge Technology have plunged 38 per cent and 25 per cent to ₹1,757 and ₹704 from their high of ₹2,834 and ₹945 in July. The average fall of other stocks in the index were about 26 per cent.
Anchal Kansal, Senior Research Analyst, Green Portfolio PMS, said the valuation of the defence sector turned very expensive after the stocks rallied over 100 per cent last year and this led to few investors booking profit.
Despite the negative sentiments, he said some of the companies in the segment bagged significant surge in order books driven by the government’s focus on privatisation and the Atmanirbhar Bharat initiative.
The sector provides a promising opportunity given the Government target to achieve 70 per cent self-reliance in defence manufacturing by 2027 and export some of the products, he said.
Santosh Meena, Head of Research, Swastika Investmart, said though the Make in India initiative bolstered a strong order book, valuations had become a concern with many defence stocks trading at levels similar to FMCG companies, despite being cyclical in nature.
Even after the recent fall, valuations remain elevated and few stocks can face further fall. While long-term investors can hold on to their positions, new investors should consider making small allocations at current levels and wait for better entry points for more aggressive buying, he added.
Production target
With an investment of $138 billion (about ₹11 lakh crore) by FY32, the defence sector has set a production target of ₹3 lakh crore by FY29. Additionally, the government has set a defence export target of ₹50,000 crore by FY29, positioning Indian companies as global leaders in defence manufacturing.
Companies in the index have strong order book and potential to deliver it on time given the buoyant demand. Hindustan Aeronautics alone has an order book of ₹94,000 crore, more than three times its FY24 revenue.
