Defence stocks tumble up to 27% since Budget presentation; time to buy?

Defence stocks have been on a slippery slope since the presentation of the Union Budget for 2024-25 (FY25). Shares of Garden Reach Shipbuilders & Engineers, for instance, have lost 26.9 per cent, while Cochin Shipyard is down 20.8 per cent since the Union Budget presentation (July 23). BEML has dropped 15.3 per cent, Mishra Dhatu Nigam 13.2 per cent, and DCX Systems 13.4 per cent, according to ACE Equity data.

Shares of Bharat Dynamics, ideaForge Technology, Data Patterns (India), Apollo Micro Systems, Paras Defence & Space Technologies, MTAR Technologies, Astra Microwave Products, Solar Industries India, and Hindustan Aeronautics (HAL), on the other hand, have declined between 1.2 per cent and 10.6 per cent during the same period.

By comparison, the benchmark National Stock Exchange Nifty 50 has gained 2.2 per cent.

The fall was likely due to profit-booking after Finance Minister Nirmala Sitharaman fell short of increasing defence allocations in the Budget, but this could be seen as an opportunity to buy defence 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 Budget,” said Palka Arora Chopra, director of Master Capital Services.

The stocks, she added, are expected to remain subdued in the near term due to rich valuations. “For the long term, however, investors may buy the dips,” she said.

Budget woes

The defence budget for the current financial year (FY25) has been pegged at Rs 6.21 trillion, the same as the Interim Budget unveiled in February. This is 0.3 per cent lower than 2022-23’s Revised Estimate.

Of the Rs 6.21 trillion, roughly Rs 1.7 trillion was set aside for capital expenditure. 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 a surge of up to 142 per cent in calendar year 2023.

Data shows Astra Microwave, Bharat Dynamics, Data Patterns, HAL, Krishna Defence & Allied Industries, Paras Defence, and Rossell India rallied between 19.4 per cent and 142 per cent last year compared to Nifty 50’s rise of 20 per cent. They have gained between 15 per cent and over 105 per cent so far this year against Nifty 50’s rise of 15.2 per cent.

“Defence stocks have been in a strong bull run over the past one to two years. There should be no complaints about the short-term correction and profit-booking,” said Gaurang Shah, head investment strategist at Geojit Financial Services.

Buy for long term

Analysts believe defence stocks are still overpriced, with their price-to-earnings ratios not fully justified. Thus, they suggest not buying right now, as prices are expected to continue to drop.

Interested investors, they added, should wait for further dips before entering these counters.

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 three to five years, the management growth guidance, defence companies’ active participation in the Make In India initiative, and vast export opportunities will boost the sector,” said Chopra.

As of March 2024, HAL’s order book stood at Rs 94,129 crore. Bharat Heavy Electricals had a total outstanding order book of Rs 1.31 trillion.

Bharat Dynamics’ order book was valued 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 was valued at Rs 36,839 crore. Meanwhile, as of April 1, 2024, Bharat Electronics’ order book stood at Rs 75,934 crore.