BDL, Mazagon Dock shares drop 2% as high valuations put pressure on defence stocks post- short-term rally

BDL, Mazagon Dock shares drop 2% as high valuations put pressure on defence stocks post- short-term rally

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The shares of Bharat Dynamics (BDL) and Mazagon Dock Shipbuilders dropped around 2 percent each on June 16. Both the defence stocks have seen a notable decline recently, after a record rally triggered by optimism over higher order inflows post-'Operation Sindoor'.

Bharat Dynamics shares dropped over 1.9 percent to trade at Rs 1,863 apiece, while those of Mazagon Dock Shipbuilders fell over 1.8 percent to hover around Rs 3,144 apiece in the morning. Zen Technologies shares, meanwhile, dropped nearly 1 percent to hover around Rs 1,960 apiece.

The defence stocks have been in focus on hopes of higher order inflows, after the Indian military conducted targeted strikes against terrorist outfits in Pakistan under the codename 'Operation Sindoor'. As the geopolitical tensions between India and Pakistan eased, the escalations in Russia-Ukraine war continued to support the rally in defence stocks.

The recent rise in tensions between Israel and Iran further boosted the stocks. However, analysts have flagged the elevated valuations in these stocks. The three stocks in focus have corrected partially in recent days.

Bharat Dynamics shares had gained nearly 45 percent in May since the launch of Operation Sindoor on May 7. However, the stock has now recorded losses in four out of the past seven sessions, and currently has a P/E ratio of around 141.

Mazagon Dock Shipbuilders shares had jumped over 34 percent in May since the operation. However, the shipping stock has now extended losses for the fourth consecutive session. It currently has a P/E ratio of nearly 56.7.

Zen Tech shares meanwhile surged over 60 percent in May, but have closed in the red in five out of the past eight sessions.

Nifty India Defence index however gained nearly 0.4 percent to hover around 8,824. Cochin Shipyard and Bharat Electronics (BEL) hares were up over 1.5 percent each, while those of Garden Reach Shipbuilders and Engineers (GRSE) and others were trading in the green with marginal gains.

Despite the elevated valuations, investment research firm GoalFi's founder Robin Arya said that there is still some reasons why investors should selectively look at the space. While valuations have re-rated sharply post Operation Sindoor, we remain selective, not avoidant. The Nifty Defence Index rallied over 18 percent in May, adding nearly Rs 1.8 lakh crore in investor wealth… However, this is backed by a Rs 16 lakh crore domestic procurement pipeline and a Rs 3 lakh crore defence export target by 2029, up from Rs 1,941 crore in 2014. Structural improvements in execution, return ratios, and global demand make selective participation justified despite premium valuations," he said.

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