HAL, BEL, Mazagon Dock & other multibagger defence stocks fall up to 42% from highs. Should you buy?

Stock Market Today: Hindustan Aeronautics Ltd, Bharat Electronics, Cochin Shipyard Ltd, Mazagon Dock Shipbuilders Ltd, and Garden Reach Shipbuilders & Engineers Ltd have seen up to 42% decline in their share prices from highs touched in July 2024.

Despite this decline, Hindustan Aeronautics Ltd, Bharat Electronics, Cochin Shipyard Ltd, Mazagon Dock Shipbuilders Ltd, and Garden Reach Shipbuilders & Engineers Ltd share prices are still up 105-193% over the last one year, having given multibagger returns to investors.

Defence Sector Outlook

The prospects for defence manufacturers remain strong given solid domestic order inflows and a rise in export orders. The rising geopolitical stress also keeps defence manufacturers in focus. Defence Minister Rajnath Singh's recent statement that India’s defence exports will touch ₹50,000 crore in 2029-30 has further added to investor confidence.

While the order book and prospects remain strong, it is the valuations that need to be watched, said analysts.

Over the past year, valuations have expanded significantly from their long-term averages due to the government-imposed import bans on numerous products. The Nifty India Defence PR Index’s 1-year forward valuation reached a high of 58 times in July, compared to a 3-year average of 29 times, and is currently trading at 41 times.

The defence sector’s outlook has markedly improved, driven by the government’s vigorous modernisation efforts, a strong order book, and a robust order pipeline, Anil R, Senior Research Analyst, Geojit Financial Services. 

Despite domestic companies having substantial orders, execution risks persist due to the size of the order book and supply chain issues, said Anil R. “Some stocks have experienced corrections of 20–30%, yet valuations remain elevated and do not align with the near-term slower order execution. As a result, near-term underperformance is anticipated,” added Anil R.

Chokkalingam G Founder, Equinomics Research Pvt Ltd also said that valuation comfort still is not there in the defence sector stocks.

Meanwhile, among key results declared by defence majors, Bharat Electronics impressed with better-than-expected Q2FY25 performance, largely driven by better-than-expected margin performance. Revenue growth was led by a strong order book, which stood at ₹746 crore, said analysts. Order inflows stood at ₹7,400 crore during 1HFY25. 

Analysts at Motilal Oswal Financial Services said that they expect defence ordering to start ramping up in the coming quarters. They expect Bharat Electronics to remain a key beneficiary of the same, with key focus areas being from naval, EW systems, artillery systems, platform orders, Kavach, exports, etc. MOFSL expects Bharat Electronics revenue to grow at 19% CAGR over FY24-27, driven by improved market share on account of enhanced wallet share and improved indigenised offerings.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.