Defence stocks decline as investors reassess valuations amid profit booking
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Mumbai: Defence stocks dropped on Thursday as investors reassessed their stretched valuations after the recent rebound.The Nifty India Defence Index shed 2% while the benchmark Nifty closed 0.5% lower on Thursday. Out of 18 stocks on the index, 16 declined and two advanced. Bharat Dynamics dropped 4.8% to ₹1,893, leading the Defence Index laggards, after brokerage Motilal Oswal initiated coverage on the stock with a 'neutral' rating and a target price of ₹1,900, which implied a downside of 4.3% over Wednesday's closing price of ₹1,985."We like the business model of BDL and its ability to scale up its revenues and order book in the current scenario; however, with fair valuations, we would look for lower price points to enter the stock," said analysts at Motilal Oswal.Solar Industries dropped 3.3% and Zen Technologies shed 2.9%. Data Patterns, Astra Microwave and Garden Reach fell over 2.5%. Hindustan Aeronautics declined 1.9% while BEML and Paras Defence and Space Technologies shed 1.4% each."The fall in defence stocks today was largely due to profit booking and easing of geopolitical tensions ," said Pranay Aggarwal, director and CEO, Stoxkart. "Given the strong rally in the stocks, the corrections were bound to happen."In the past three months, the Nifty India Defence Index jumped 42.2% while the Nifty gained 13.2%, as aggravated geopolitical tensions raised expectations of higher defence spending. The rebound revived concerns over rich valuations, which had eased in April following the stock price declines since the end of September."The correction was due to overvaluation in the defence stocks as the sector is trading at around 60 times price to earnings, which is significantly higher than the historical average," said Ashwini Shami, EVP & portfolio manager at OmniScience Capital.Much of their stock outlook will depend on the execution of existing orders by defence companies, as valuations leave little margin for error.'The growth in the defence companies is already priced in the stocks; so unless the companies continue to deliver 18- 20% growth, sharp declines are likely,' said Shami.'Further falls cannot be ruled out due to premium valuations.' Fund managers are counting on continued defence spending to keep the share valuations at elevated levels. 'Some of the companies can witness 70-80% growth in order inflows, which is expected to justify the valuations especially given the significant export opportunities in the next three to five years,' said Bhalchandra Shinde, associate fund manager, Motilal Oswal AMC.He recommends a buy-on-dip strategy for defence stocks. 'Stocks are likely to remain sideways for rest of year since there are no major events in July to December period for sector and most orders are secured between January to March,' said Shinde.
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