Most defence stocks including Hindustan Aeronautics Limited (HAL), Bharat Electronics (BEL) and Bharat Dynamics (BDL) declined by more than 4% on Thursday.

What Happened: Most public sector stocks were trading in the red today. Defence stocks followed suit in what analysts assume to be a market correction.

HAL lost the most with its shares plummeting over 5%, whereas Garden Reach Shipbuilders (GRSE) was one the least affected as its shares dipped marginally.

The sector is in the normal course of correction and the decline in share prices can be attributed largely to the sector trading at a higher valuation, said Ajit Mishra, senior vice president at Religare Broking.

“The way the stocks have performed from the last six months to 12 months, the Q1 earnings were not up to the mark and this price and earnings mismatch is one of the major reasons behind the recent correction,” Prashanth Tapse, senior VP research analyst at Mehta Equities told Benzinga India.

He added that the government has been extending its support to the government and that can be seen in the order inflows. However, he said that the outlook in the short term is not bright. “The long-term outlook is really good but the near-term outlook with respect to maintaining the margins or giving a decent growth is questionable,” the analyst added.

He advised that investors could look to accumulate stocks that have seen over 30% correction. HAL and Cochin Shipyard are his top picks at the moment.

“The defence sector's outlook has markedly improved, driven by the government's vigorous modernization efforts, a strong order book, and a robust order pipeline,” said Anil R, senior research analyst, Geojit Financial Services. “Over the past year, valuations have expanded significantly from their long-term averages due to the government-imposed import bans on numerous products. The Nifty India Defence PR Index's 1-year fwd. valuation reached a high of 58x in July, compared to a 3-year average of 29x, and is currently trading at 41x,” he added.

He also mentioned that while the companies have robust order books, execution risks persist due to the size of the order book and supply chain issues. “Some stocks have experienced corrections of 20–30%, yet valuations remain elevated and do not align with the near-term slower order execution. As a result, near-term underperformance is anticipated,” the analyst added.

The stocks have all given negative returns in the past month. HAL’s share price is down by 12%, BEL has lost 10.5%, BDL has gone down by nearly 16%, GRSE has plunged 11.4%, Mazdock has suffered a 14% decline and Cochin Shipyard has seen the worst downfall of 22.5%.

On the other hand, private firms like Data Patterns and Paras Defence have lost more than 10%.

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Last week, analysts at Kotak Institutional Equities noted that despite the recent market correction, there remains a significant gap between the actual value and the current market capitalisation of so-called "narrative" stocks and public sector scrips.

They predict further corrections for these narrative stocks, as many of them continue to trade at “unfathomable valuations”. Among defence stocks, the brokerage said it saw downsides of between 21%-62% in Cochin Shipyard and Bharat Electronics from their market prices on September 10. 

However, on a year-to-date basis, all of them have delivered impressive returns, many even doubling their value. HAL has soared 49%, BEL is up 46%, BDL raced 29.5% upwards, Mazdock has risen 77%, GRSE’s shares have advanced by 95% and Cochin Shipyard has had the best run among PSUs in the year so far, with its shares skyrocketing by 145%.

On September 3, the Defence Acquisition Council (DAC) approved major procurements worth ₹1.44 lakh crore for the Indian Armed Forces. The DAC's approvals signalled the beginning of the long defence procurement process, which further sent defence stocks rallying.

Price Action: Here is how defence stocks are trading on Thursday amid a broad market correction:

HAL shares plunged 5.49% to ₹4,194, BEL shares declined 4.40% to trade at ₹270.40 and BDL shares lost 4.13% to trade at ₹1,118.25.

GRSE dipped 1.79% to ₹1,686.35, Mazdock suffered a 3.41% decline to trade ₹4,035.70 and Cochin Shipyard plummeted 3.56% to ₹1,664.30.

Among the private companies, Paras Defence lost 3.33% to trade at ₹1,071, while Data Patterns lost 4.63% to trade at ₹2,532.10.

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