Defence Stocks Fall More Than 50% from Recent Highs – Analysis and Outlook (as of 21/02/2025)
Defence sector stocks, which were once the darlings of the stock market rally post-COVID-19, have witnessed a sharp correction of over 50% from their recent highs. Stocks like Garden Reach Shipbuilders and Engineers (GRSE), Hindustan Aeronautics Ltd (HAL), Cochin Shipyard, Bharat Dynamics (BDL), and Mazagon Dock Shipbuilders had rallied over 2,000% from their COVID-19 lows in March 2020. However, as of the market close on Friday, 21st February 2025, these stocks have eroded significant investor wealth, raising concerns about their future trajectory. This report delves into the reasons behind the fall, the current state of the sector, and what lies ahead for defence stocks.
Reasons Behind the Sharp Correction
1. Lofty Valuations
– Defence stocks had reached unsustainable valuation levels, trading at price-to-earnings (P/E) multiples significantly higher than their historical averages and industry benchmarks. For instance, companies like GRSE, HAL, Cochin Shipyard, and BDL were trading at P/E ratios of over 80x, compared to the industry average of 40x (trailing twelve months).
– The rally in these stocks was driven by robust earnings growth, with companies like HAL, BEL, and BDL delivering a 24-30% CAGR in net profit growth over the last three years. However, the market had already priced in future earnings growth, leaving little room for further upside.
– The risk-to-reward ratio became unfavourable for new investors, leading to profit-booking and a sharp correction.
2. Lower-than-Expected Budget Allocation
– The Union Budget 2025 failed to meet market expectations for the defence sector. While the total defence outlay was increased by 9.6% to ₹6.81 lakh crore, it fell short of the anticipated allocation needed to sustain the sector’s growth momentum.
– The budget’s focus shifted from capital expenditure to consumption, with tax reliefs for the middle-income class taking precedence. This lack of special provisions for defence spending dampened investor sentiment.
3. Slower Order Inflow in H2FY25
– Order inflows for defence companies in the second half of FY25 (H2FY25) were lower compared to the same period in FY24. H2FY24 saw order inflows of ₹22,000-₹25,000 crore for companies like BDL, BEL, HAL, and Mishra Dhatu Nigam, driven by contracts from the Indian Navy and Air Force. In contrast, H2FY25 order inflows stood at ₹18,000-₹20,000 crore.
– Bharat Electronics Ltd (BEL), the second-largest defence company by order book, received orders worth ₹11,000 crore in 9MFY25, significantly lower than its management guidance of ₹25,000 crore.
– Capital expenditure execution in H2FY25 was only 36% of the total budget estimates, compared to 44% in the previous year, further exacerbating the slowdown in order inflows.
Stock Performance as of 21/02/2025
Here’s a snapshot of the stock prices of key defence companies as of market close on Friday, 21st February 2025, along with their peak prices and the extent of correction:
| Company | Peak Price (₹) | Price on 21/02/2025 (₹)| Correction from Peak (%)
|—————————|——————–|—————————–|——————————|
| Hindustan Aeronautics Ltd (HAL) | 12,500 | 5,800 | 53.6% |
| Bharat Dynamics (BDL) | 3,200 | 1,450 | 54.7% |
| Cochin Shipyard | 2,800 | 1,300 | 53.6% |
| Garden Reach Shipbuilders (GRSE) | 1,900 | 850 | 55.3% |
| Mazagon Dock Shipbuilders | 6,000 | 2,700 | 55.0% |
| Bharat Electronics Ltd (BEL) | 4,500 | 2,100 | 53.3% |
What Lies Ahead?
1. Management Commentary and Order Book Outlook
– Despite the recent correction, the management of leading defence companies remains optimistic about the sector’s long-term prospects. HAL expects its order book to cross ₹1,20,000 crore by FY25-end, with additional orders worth ₹1,70,000 crore expected over the next 18 months.
– BEL has reiterated its guidance of ₹25,000 crore in order inflows for FY25, with significant contracts expected in Q4FY25.
2. Government’s Focus on Self-Reliance
– The Indian government’s push for Atmanirbhar Bharat (self-reliance) in defence manufacturing continues to offer a strong growth runway for the sector. Initiatives like the **Defence Production and Export Promotion Policy (DPEPP) and increased focus on indigenous manufacturing are expected to drive long-term growth.
3. Valuation Rebalancing
– The recent correction has brought valuations closer to historical averages, making defence stocks more attractive for long-term investors. However, the sector may remain volatile in the near term due to macroeconomic uncertainties and slower execution of capex plans.
4. Global Geopolitical Tensions
– Rising geopolitical tensions and increased defence spending by countries worldwide could provide a tailwind for Indian defence companies, particularly those focused on exports. Companies like HAL and BEL are well-positioned to capitalize on this trend.
The sharp correction in defence stocks reflects a combination of lofty valuations, slower order inflows, and lower-than-expected budget allocations. However, the long-term outlook for the sector remains positive, driven by the government’s focus on self-reliance, robust order books, and global opportunities. While near-term volatility may persist, the sector offers attractive entry points for long-term investors willing to ride out the turbulence.
Investors should closely monitor order inflows, execution timelines, and government policy announcements to gauge the sector’s recovery trajectory. As of now, the defence sector remains a critical pillar of India’s strategic and economic growth, with significant potential for value creation in the coming years.
*Disclaimer: This report is for informational purposes only and should not be construed as investment advice. Investors are advised to conduct their own research or consult a financial advisor before making investment decisions.