Shares of defence companies, once a darling of the market, came under selling pressure yet again on October 22 amid a broader sell-off in the small and mid-cap space. Stocks like Mazagon Dock Shipbuilders, Garden Reach Shipbuilders and Engineers, and Bharat Dynamics—leaders of the defence rally over the past two years—were among the hardest hit, declining by 6-12 percent.
Others, like Hindustan Aeronautics, Bharat Electronics, Paras Defence, and Astra Microwave, were also floating in losses, down by 3-5 percent.
The frenzy surrounding the defence sector in recent years attracted significant inflows, spurred by optimistic growth expectations on the back of the government's push for indigenisation of defence equipment. This relentless buying spree, regardless of entry points, propelled many stocks in the sector to soar over 100 percent in recent times.
However, as concerns about lofty valuations became more pronounced, growing uncertainties in the market prompted a wave of profit booking among defence stocks. This triggered a strong pullback, causing many defence stocks to retreat sharply from their record highs.
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While the outlook for defence companies remains solid, it is the stretched valuations—outpacing fundamental performance—that have raised alarms for investors. Despite the recent correction bringing valuations down from exuberant levels, they have yet to reach reasonable standards.
Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, asserts that the fundamentals of defence stocks remain exceptionally robust, highlighted by strong revenue, profits, growth visibility, and order books extending 5-10 years. He notes that while a few pure-play defence stocks still present attractive investment opportunities from a valuation standpoint, many others appear to be overvalued.
"For defence investors, this requires creativity and a broader understanding of the various dimensions of defence in modern geo-strategy. One might consider investing in other dimensions of defence, such as energy security, rare and strategic materials, logistics and supply chains supporting defence forces, and financial and other support for strategic global locations like ports," Gupta stated.
"By broadening one’s understanding of defence, it’s still possible to gain exposure to the sector in non-traditional ways. However, the portfolio may not look like a typical defence portfolio to those unfamiliar with this approach," he added.
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