Recent increases in defence stocks were driven by the Make in India push, surging exports, and sizable order books. Investors’ opinions on value, however, were divided.

A correction was imminent as the recent rise in defense equities reached stratospheric heights. As expected, these stocks’ share prices fell between 4 and 12 percent by the close of the weekly trading session.

Following a strong run, “defense stocks have experienced a correction of about 10%,” Anirudh Garg, Partner and Head of Research, at Invasset, revealed.

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Profit Booking

Profit-taking by individual retail investors is the main cause of the recent selling pressure. Garg pointed out that the selling in recent days was not, however, accompanied by a significant trading volume.

Due to the recent losses in the mid-cap and small-cap groups, some retail investors may have booked partial profits in defense stocks. It is reasonable that investors wanted to lock in their profits, Garg said, given the significant returns defense stocks have produced recently.

Backdrop

Recent increases in defense stocks were driven by the Make in India push, surging exports, and sizable order books. Investors had differing views on value, though.

Untapped capacity Defence stocks

The defence industry has long been recognized by the market as a source of alpha creation (huge returns), and market analysts have frequently emphasized the substantial untapped growth potential that still needs to be investigated in these firms.

According to Amit Anwani, Research Analyst at Prabhudas Lilladher, “Stock valuations were stretched, but when taking a long-term perspective into account, investors generally found the premium acceptable.”

Anwani did issue a warning, though, saying that at this time it would be foolish to rule out additional adjustment. He was quick to stress that the industry’s long-term development prospects are still positive, though. He advised long-term investors to think about purchasing defense companies, stressing that they would need to see a minimum correction of 20–25 percent before they reached a profitable level.

Favorable long-term outlook Defence stocks

Because of the rise in institutional ownership, which has resulted in a decline in their total market liquidity, Garg thinks these companies offer little downside risks.

In the meanwhile, Antique Stock Broking believes that the sector’s multi-year growth prospects have greatly improved, supporting the present values. Given the long-term potential of the Indian defense manufacturing industry, stock values of 24 to 25 times earnings for the fiscal year 25 are not at all stretched, according to the brokerage company.

In regards to Bharat Electronics, Bharat Dynamics, Hindustan Aeronautics, Mazagon Dock Shipbuilders, and Garden Reach, the brokerage company has maintained its favorable position. It agrees with Anwani’s viewpoint that the industry has significant development potential and, as a result, justifies a long-term investment strategy.

Even Garg agreed that long-term investors may want to consider the present sell-off as a buying opportunity. Therefore, utilizing additional dips as an opportunity to build holdings may be a more advantageous approach for individuals with a long-term time horizon, he continued.

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