Defence stocks have fallen by as much as 30% in the last month as investors take profits after huge gains over the past year and a half. Experts advise against buying these stocks now and suggest waiting for clearer signs of recovery before investing in this sector.
In the Nifty Defence index, six stocks saw their prices drop significantly, with Cochin Shipyard leading the losses, down 30% in the last month. It was followed by Garden Reach Shipbuilders & Engineers, which fell 26%, and Mazagon Dock Shipbuilders, which declined 21%.
Other stocks, including BEML, Data Patterns (India), Bharat Dynamics, Bharat Electronics, Hindustan Aeronautics (HAL), Paras Defence And Space Technologies, and Astra Microwave Products, lost between 19% and 0.20%.
As of August 30, 2024, the Nifty Defence index showed a return of around -5% for the quarter.
Dr. Ravi Singh, Senior Vice President of Retail Research at Religare Broking, advises investors not to buy these stocks yet. “Invest only when there are clear signs of recovery, which are not visible in most defence stocks right now. It’s better to wait for stronger signals before making any moves,” he said.
Despite recent declines, many defence stocks delivered strong returns in FY24, with six out of ten showing multibagger gains. For example, Cochin Shipyard rose 280%, while others like Mazagon Dock, BEML, Bharat Electronics, HAL, and Astra Microwave showed gains between 120% and 280%. So far in FY25, four stocks have turned into multibaggers, with Garden Reach Shipbuilders leading at 137% returns.
The Nifty India Defence Index has gained 115% over the past year and 65% year-to-date. The top three stocks in the index by weight are Bharat Electronics (20.22%), HAL (18.23%), and Solar Industries (15.79%). Solar Industries, a private company, makes explosives and ammunition.
While Singh acknowledges that the defence sector looks overheated and advises caution, he sees potential in stable companies like HAL, Astra Microwave, Bharat Electronics Limited (BEL), and Paras Defence. These stocks could lead in case of a market recovery.
Based on technical analysis, stocks like Cochin Shipyard, Garden Reach, Mazagon Dock, and Data Patterns may continue to face downward pressure and could see further declines, so investors should be careful.
Deepak Jasani, Head of Retail Research at HDFC Securities, suggests a “sell on rise” strategy. While these stocks might bounce back, many investors may sell on that rise to cut their positions. Jasani believes that within the defence sector, companies focused on electronics, tanks, ammunition, drones, and anti-drone technology may perform well over the long term, but investors need to carefully time their entry and exit.
For Cochin Shipyard, he thinks profit growth may slow despite good sales. “Shipyard stocks have fallen the most, but this is after they rose significantly from their lows. Even with a large order book, the market thinks earnings growth might slow after a strong performance in FY25-FY27,” Jasani said.
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