JPMorgan initiates 'overweight' call on HAL, Bharat Electronics; Mazagon Dock bags 'neutral' rating

Shares of Bharat Electronics, Hindustan Aeronautics, and Mazagon Dock have plummeted 14-28 percent from their record highs in recent months.

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International brokerage JPMorgan has initiated coverage on Indian defence stocks foreseeing a long runway of structural growth for the sector. While the firm assigned 'overweight' calls for Bharat Electronics and Hindustan Aeronautics, industry peer Mazagon Dock Shipbuilders received a 'neutral' rating.

JPMorgan also anticipates strong growth in defence production as well as exports, which make these stocks an even lucrative bet. The cherry on top being the recent stock price correction amid heavy profit booking, which according to JPMorgan, presents an opportunity to lap up defence stocks at lower valuations. To quantify, shares of Bharat Electronics, Hindustan Aeronautics, and Mazagon Dock have plummeted 14-28 percent from their record highs in recent months.

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Factoring that in, along with forecasts of strong growth, JPMorgan assigned a price target of Rs 340 for shares of Bharat Electronics, implying an over 16 percent upside potential from Monday's closing price. The stock was also JPMorgan's preferred pick within the defence pack, largely due to its exposure to structural growth.

As for Hindustan Aeronautics, the brokerage rolled out a price target of Rs 5,135, reflecting the scope for a near 20 percent upside from the previous closing level. However, Mazagon Dock Shipbuilders got a target price of Rs 4,248, meaning a mere 2 percent upside potential from Monday's close.

Following the positive views from JPMorgan, shares of HAL, BEL and Mazagon Dock were also trading with 2-3 percent gains as of afternoon trade.

Now while JPMorgan might have turned optimistic over prospects of the defence pack, most others on the Street are yet to turn their heads around. Analysts argue that despite the sharp correction in defence stocks--once the darlings of the Street-- valuations continue to run beyond fundamentals, hampering their risk-reward.

Independent market analyst Ambareesh Baliga stated that while stock prices have surged up to 15x, profits have grown only 3–4x, underscoring the disconnect between fundamentals and valuations.

Hemant Shah, fund manager at Seven Islands PMS, highlighted the role of execution over sheer order book size. He pointed out that smaller players in the sector could outpace giants like HAL and BEL by executing faster and addressing backlogs efficiently.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.