Defence companies need Rs 1.4 lakh crore order execution annually to justify valuations
The total market cap of these defence companies is currently pegged at Rs 3.40 lakh crore. There are already signs of weakness in the defence space after the record-breaking rally.
NEW DELHI: Defence companies require execution of Rs 1.4 lakh crore worth of defence orders annually to justify their current stock prices, according to a brokerage report. This assumption from the leading brokerage comes after nine defence stocks in its basket on average rallied nearly 80% in the past six months on expectations of large spending by the government, a steady increase in indigenisation and large deal wins.
“In our view, the stocks largely factor in the aforementioned positives, but not potential risks of delays in ordering and lower profitability,” said Kotak Institutional Equities in a report on Monday. It added, “Our reverse valuation analysis based on the current market capitalisation of a basket of major defence stocks suggests that these companies will need to execute around Rs 1.4 lakh crore of defence orders annually to justify their current stock prices.”
For context, Kotak’s defence basket companies, which include HAL, BHEL, and Mazagon Dock Shipbuilders, among others, had a combined revenue of Rs 62,500 crore in FY2023. The total market cap of these defence companies is currently pegged at Rs 3.40 lakh crore. There are already signs of weakness in the defence space after the record-breaking rally.
Even as the benchmarks, Nifty and Sensex, hit record high levels last week, defence stocks have been under selling pressure. For instance, shares of Bharat Dynamics have fallen 10% in the last 5 trading sessions while BEML, formerly Bharat Earth Movers Limited, is down about 9% during the period.
“A sharp correction in defence stocks cannot be ruled out at this point as valuations were stretched. A minimum correction of at least 25% can put many stocks in the sector in a sweet spot for investors,” said a leading equity market analyst.
Kotak estimates there is a market opportunity of Rs 1.6 lakh crore for domestic procurement by FY2026 based on its assumptions of strong growth in overall defence capex and low growth in imports due to indigenization. However, profitability may be a bigger challenge for many companies amidst rising competition from the entry of many private companies in this space.