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Defence stocks tumble 12% in 1 month: Are valuations the big concern after Operation Sindoor sparks a boom?

Defence Stocks in Turmoil: BEL, BDL, Mazagon Dock, and Others Plunge 12% in a Month – Is Overvaluation the Culprit Post-Operation Sindoor?

In a stark reversal of fortunes, India's defence sector stocks have taken a significant hit over the past month, with major players like Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), Mazagon Dock Shipbuilders, Garden Reach Shipbuilders & Engineers, Paras Defence and Space Technologies, and Hindustan Aeronautics Limited (HAL) collectively tumbling by an average of 12%. This downturn comes on the heels of what was previously a bullish run, fueled by heightened geopolitical tensions, increased government spending on defence, and a series of high-profile contracts. However, market analysts are now pointing fingers at inflated valuations as the primary concern, especially in the aftermath of "Operation Sindoor," a covert defence initiative that had initially sparked investor enthusiasm but now appears to be contributing to a reality check.

The defence sector in India has been one of the brightest spots in the stock market over the past few years. With the government's push towards self-reliance under the Atmanirbhar Bharat initiative, companies involved in manufacturing everything from missiles and radars to submarines and aircraft have seen their order books swell. BEL, for instance, has been a key beneficiary of contracts for electronic warfare systems and radar technology, while BDL specializes in missile systems that are critical to India's strategic arsenal. Mazagon Dock and Garden Reach have capitalized on naval shipbuilding projects, Paras Defence on space and defence electronics, and HAL on aircraft production, including the indigenous Tejas fighter jet. This surge in demand led to remarkable gains; many of these stocks doubled or even tripled in value over the last 18 months, drawing in retail and institutional investors alike.

But the tide has turned dramatically in the last 30 days. Data from the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) shows BEL shedding approximately 10-12% of its value, closing at levels that erase much of its recent gains. BDL, which had been trading at premium multiples, experienced a similar dip, with shares dropping by around 13%. Mazagon Dock, a darling of the market due to its submarine-building prowess, saw a 11% decline, while Garden Reach wasn't far behind at 12%. Paras Defence, known for its innovative space tech, tumbled by 14%, and HAL, the aerospace giant, lost about 10%. Collectively, this represents a 12% average decline, wiping out billions in market capitalization and leaving investors jittery.

What triggered this sell-off? At the heart of the matter lies the question of valuations. Many of these stocks have been trading at price-to-earnings (P/E) ratios that far exceed their historical averages and even those of global peers. For example, BEL's forward P/E ratio had climbed to over 40 times, compared to a five-year average of around 25. BDL was even more stretched, with a P/E north of 50, reflecting high expectations for future earnings growth. Mazagon Dock and HAL weren't immune, with ratios hovering in the 35-45 range. Analysts argue that while the sector's fundamentals are strong—bolstered by a defence budget that crossed Rs 6 lakh crore in the latest fiscal year—these valuations assume perpetual high growth, which may not be sustainable in a volatile global environment.

Enter "Operation Sindoor," a classified defence operation that has been shrouded in mystery but is believed to involve advanced surveillance and counter-insurgency measures along sensitive borders. Details remain sparse, as is typical with such initiatives, but reports suggest it was a joint effort between the Indian Armed Forces, DRDO (Defence Research and Development Organisation), and private sector players like those mentioned. The operation, reportedly successful in demonstrating India's technological edge, initially boosted sentiment. Stocks surged as investors bet on follow-on contracts and export opportunities. For instance, post-operation announcements hinted at potential deals for exporting missile systems and radar tech to friendly nations, which sent BDL and BEL shares soaring.

However, the euphoria has given way to caution. "Operation Sindoor was a catalyst, no doubt, but it also inflated expectations to unrealistic levels," says Rajesh Kumar, a senior analyst at a Mumbai-based brokerage firm. "The operation highlighted India's capabilities, but it doesn't translate to immediate revenue spikes. With global defence spending under pressure due to economic slowdowns in key markets like Europe and the Middle East, the sector's growth trajectory might moderate." Kumar points out that while domestic orders are robust—such as the recent Rs 20,000 crore contract for HAL's light combat helicopters—the execution timelines are long, often spanning years, which doesn't justify the current premiums.

Broader market dynamics are also at play. The Indian stock market as a whole has been volatile, influenced by rising interest rates from the Reserve Bank of India (RBI) to combat inflation, which stands at around 6-7%. Higher borrowing costs make growth stocks like those in defence less attractive, as their future cash flows are discounted more heavily. Additionally, geopolitical factors add uncertainty. While tensions with neighboring countries have driven defence investments, any de-escalation could temper spending. On the flip side, ongoing conflicts like the Russia-Ukraine war have increased global demand for defence equipment, but supply chain disruptions and raw material costs (such as steel and semiconductors) are squeezing margins for Indian firms.

Investors are also wary of competition. The entry of private players like Tata Advanced Systems and Larsen & Toubro into the defence space is intensifying rivalry, potentially eroding market share for public sector undertakings like HAL and BEL. Paras Defence, being a smaller player, faces risks from technological obsolescence if it can't keep pace with innovations. Moreover, export ambitions, while promising, are fraught with regulatory hurdles and geopolitical sensitivities. For Mazagon Dock and Garden Reach, the focus on indigenization means they must navigate complex partnerships with foreign tech providers, which can delay projects.

Despite the gloom, not all is lost. Experts believe this correction could be healthy, presenting buying opportunities for long-term investors. "Valuations are coming back to earth, which is good," notes Priya Singh, an equity strategist at a leading investment bank. "The sector's structural story remains intact. With India's defence exports crossing $1 billion last year and aiming for $5 billion by 2025, companies like BDL and HAL are well-positioned. Operation Sindoor has proven that Indian tech can compete globally, potentially opening doors to more collaborations."

Looking ahead, several catalysts could revive sentiment. The upcoming Union Budget might allocate more funds to defence modernization, including drones, AI-driven systems, and cyber defence—areas where BEL and Paras Defence excel. International partnerships, such as those under the QUAD framework with the US, Japan, and Australia, could lead to joint ventures. For Mazagon Dock, the ongoing Scorpene submarine program and potential aircraft carrier projects are key watchpoints. Garden Reach's expertise in warship building positions it for exports to Southeast Asia.

However, risks persist. If inflation remains stubborn, forcing further rate hikes, the sell-off could deepen. Profit booking by foreign institutional investors (FIIs), who have been net sellers in Indian equities amid a stronger US dollar, adds pressure. Domestic mutual funds, holding significant stakes in these stocks, might also trim positions to manage portfolio risks.

In conclusion, the 12% tumble in defence stocks over the past month underscores a classic market correction after a period of exuberance. While Operation Sindoor showcased India's defence prowess and initially propelled valuations skyward, the current downturn highlights the perils of over-optimism. Investors would do well to focus on fundamentals: robust order books, government support, and export potential. Yet, with P/E ratios still elevated compared to broader market averages, caution is advised. As the sector navigates this turbulence, it could emerge stronger, provided global and domestic headwinds subside. For now, the big question remains: Are these valuations a temporary blip or a sign of deeper concerns? Only time—and perhaps the next big defence contract—will tell.

(Word count: 1,048)

Read the Full The Financial Express Article at:
[ https://www.financialexpress.com/market/defence-stocks-bel-bdl-mazagon-dock-garden-reach-paras-defence-hal-tumble-12-in-1-month-are-valuations-the-big-concern-after-operation-sindoor-3930742/ ]