 "The Ministry of Defence is keen on bringing in private industry at the design & development stage. But, private firms want to come in later")
The Ministry of Defence is keen on bringing in private industry at the design & development stage. But, private firms want to come in later
Defence stocks have been on a slippery slope since the presentation of the Union Budget for 2024-25 (FY25). Shares of Garden Reach Shipbuilders, for instance, have lost 26.9 per cent, while Cochin Shipyard is down 20.8 per cent since Budget presentation (July 23), BEML 15.3 per cent, Mishra Dhatu Nigam 13.2 per cent, and DCX Systems 13.4 per cent, ACE Equity data shows.
Shares of Bharat Dynamics, ideaForge Technology, Data Patterns, Apollo Micro Systems, Paras Defence and Space Technology, MTAR Technologies, Astra Microwave Products, Solar Industries, and Hindustan Aeronautics (HAL), on the other hand, have declined between 1.2 per cent and 10.6 per cent during the period.
By comparison, the benchmark Nifty50 index has gained 2.2 per cent.
The fall was likely on account of profit booking after Finance Minister Nirmala Sitharaman fell short of increasing defence allocation in the Union Budget, and could be used as an opportunity to buy related stocks for the long-term.
“A correction was needed in defence stocks as they were overvalued after the interim budget amid high expectations from the Union Budget,” said Palka Arora Chopra, director of Master Capital Services.
The stocks, she added, are expected to remain subdued in the near-term amid rich valuations. “For the long-term, however, investors may buy the dips,” she said.
Budget woes
The defence budget for the current fiscal year has been pegged at Rs 6.21 trillion, same as the interim budget unveiled in February. This was 0.3 per cent lower than FY23’s revised estimate.
Of the Rs 6.22-trillion, approximately Rs 1.7 trillion was set aside for capital expenditures. Thus, the amount allocated to the defence sector, effectively, was Rs 4.49 trillion, analysts said.
The budget disappointment, analysts added, triggered the long-due correction in the space, which saw up to 142 per cent surge in the calendar in 2023.
Data shows, Astra Microwave, Bharat Dynamics, Data Patterns (India), HAL, Krishna Defence, Paras Defence and Rossell India rallied between 19.4 per cent and 142 per cent in the previous calendar year as compared to Nifty50’s rise of 20 per cent, and have jumped between 15 per cent to over 105 per cent thus far this year against Nifty50’s rise of 15.2 per cent.
“Defence stocks had been in a strong bull over the past one-two years. There should be no complaints for the short-term correction and profit booking,” said Gaurang Shah, head investment strategist, Geojit Financial Services.
Buy for long term
Analysts believe defence stocks are still overpriced and their price-to-earnings (P/E) ratios are not justified. Thus, she suggests not to buy right now, as their prices will continue to drop.
Interested investors, they added, wait for more dips before entering the counters.
Gaurang Shah, for instance, said the long-term growth story of the sector remains intact, backed by solid order intake and execution, which will eventually translate into earnings visibility.
“In the next 3 to 5 years, the management growth guidance, the defence companies’ active participation in the ‘Make in India’, and vast export possibilities will boost the defence sector,” said Palka Arora Chopra of Master Capital Services.
As of March 2024, individually, the order book of Hindustan Aeronautics (HAL) stood at Rs 94,129 crore, the total outstanding order book of Bharat Heavy Electricals (BHEL) stood at Rs 1,31,598 crore, Bharat Dynamics order book at Rs 19,434 crore and Garden Reach Shipbuilders order book stood at Rs 22,652 crore.
As of June 30, 2024, Mazagon Dock Shipbuilders’ order book stood at Rs 36,839 crore. Meanwhile, as of April 1, 2024, the order book of Bharat Electronics (BEL) stood at Rs 75,934 crore.
First Published: Aug 29 2024 | 1:20 PM IST
