As a result of this, not only have the companies catering to the sector seen an order book boom, but even their share prices.
In FY23, two defence-related stocks gave multibagger returns, while in FY24 so far, three stocks have turned multibaggers. Interestingly, all defence stocks have given minimum double-digit returns in FY24.
Mazagon Dock Shipbuilders topped the list, as the stock has given multibagger returns both in FY23 and FY24. The stock rose 177% in FY23, and a whopping 233% so far in Fy24.
Cochin Shipyard is another PSU stock that has given 154% returns in FY24 so far, following a 62% gain in FY23.
What’s driving the euphoria?
The government has lined up a capital outlay of Rs 8.3 lakh crore over the next few years, which includes procurement of equipment from the domestic defence players.Recently, the Defence Acquisition Council approved proposals worth Rs 7,800 crore, envisaging orders from the Indian Army, Indian Air Force, and the Indian Navy.
These initiatives by the government have bolstered the outlook on the order book of the companies.
“We see a focused approach by the government to enhance capabilities of all the Armed Forces, even in a pre-election year,” says Amit Dixit of ICICI Securities.
Hence, defence spending is unlikely to take a backseat, ensuring that the order books of the relevant companies remain robust, he said.
Adding a dash of optimism amidst this was the success of Chandrayaan-3, which took stocks in the aerospace and defence sectors to “cloud 9”.
So far in September, 7 defence stocks hit lifetime highs, and these are Astra Microwave, BEML, Bharat Electronics, Cochin Shipyard, Data Patterns, Garden Reach Shipbuilders, Hindustan Aeronautics, Mazagon Dock, and Paras Defence.
“Chandrayaan-3 success would definitely lead more countries and companies globally looking at the talent pool in India and this would open up opportunities in the services/manufacturing space,” said Shreyash Devalkar, head – equity, Axis Mutual Fund.
“We do have exposure to select aerospace and defence stocks where we believe the underlying fundamentals are strong,” he said.
Are valuations justified?
There’s no doubt that the increasing interest in the defence sector has resulted in a re-rating and a meteoric rise in the market valuation of the companies.
While for some money managers, few stocks have entered the discomfort zone, many believe that the valuations are justified.
Mazagon Dock is among the stocks that analysts are not comfortable with from a valuation standpoint, after the stellar rally. It has an average target price of Rs 806, according to Trendlyne, which implies a downside of over 64% from the current levels.
However, Antique Stock Broking believes that the confidence in multi-year growth opportunities have further magnified, justifying prevailing valuations of the sector.
“Given the long-term potential of the Indian defence manufacturing sector, valuations of stocks at 24-25x FY25E earnings are not stretched by any means,” it said.
It believes that emerging companies from the private sector offer exponential growth potential and, hence, must be looked at from a long-term investment point of view.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)