Defence stocks have been under pressure in the last five days after the huge rally they had in the bourses in the last year. Market experts say the correction is due to the excessive valuation and the possibility that the government will sell some stake in public sector stocks in the upcoming Union Budget.

What Happened: Mazagon Dock has fallen more than 9%, Cochin Shipyard more than 11%, Bharat Electronics 9%, Hindustan Aeronautics more than 13% and Bharat Dynamics almost 12%.

Market experts said the PSU stocks are trading at expensive valuations. V K Vijayakumar, chief investment strategist, Geojit Financial Services said, "Big disinvestment in PSU stocks is likely in the Budget. The defence and railway stocks have good long-term prospects, but their valuations are excessive. This overvaluation is mainly due to the low floating stocks in many of these stocks. With disinvestment, the supply of these stocks will increase pushing their prices down to more realistic levels. The market is discounting this in anticipation of disinvestment announcements." 

Finance Minister Nirmala Sitharaman will present the Union Budget for FY2025 on July 23.

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Shailesh Saraf, managing director of Dynamic Equities and founder of Value Stocks also said the correction is due to fear of budget. "Defence stocks are witnessing a small correction after the huge rally they had in the past year. Even a 10% correction in the stocks is small after their run-up. There is also the expectation that the government may look to divest some shares in the government companies in the upcoming budget. As the current account deficit has increased a bit in the budget, the government might look to sell some shares in the PSU companies which include defence stocks due to the elevated market conditions." He added.

In a recent note, Antique Stock Broking shared bullish calls on defence stocks as the defence ministry released the fifth Positive Indigenisation List (PIL) for items worth ₹1,048 crore in import substitution value.

Companies such as Hindustan Aeronautics and Bharat Electronics are sitting on top of order books worth ₹94,000 crore and ₹76,000 crore respectively.

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