Have Defence stocks run up too much too fast, is there enough armoury to sustain more gains?

Defence stocks have been the toast of the town for a while, surging 65% in the past month. Strong order book and government push for localisation in defence have been helping these stocks. However, often the question is has the run-up in the stocks has been too much and soon. 

Mazagon Dock up 3200% in 5 years 

Shares of Mazagon Dock Shipbuilders have given a whopping return of over 3200% in the past five years. This simply means that if you’d invested Rs 10,000 in the company you would had almost Rs 3.4 lakh. Mazagon Dock Shipbuilders have a market cap of Rs 1.16 lakh crore as of July 11, 2024 and the stock closed at a price of Rs 5,710 a piece.

“Due to elections in April and May, order inflows might see some softness. Though we expect a pickup in order inflows from H2FY25,” said JM Financial in a research report. 

“We expect Defence companies to report healthy numbers backed by strong opening order book and continued execution momentum,” said JM Financial. 

Mazagon Dock reported a Q4 net profit of RS 662.97 crore, a surge of 101% on year in comparison to Rs 326.19 crore it reported in the corresponding period a year ago. The company’s revenue climbed 49% to Rs 3103.65 crore for Q4 of FY24 compared to Rs 2078.59 crore it reported in the same quarter of the previous year.  

According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, many PSUs have become momentum stocks that are excessively traded by speculators. Some PSUs are fairly valued like PSU banks. Defence and Railways PSUs have run up too much too fast. “Even though the prospects for these segments look bright for many years, there is no valuation comfort in these segments. They have already discounted the earnings for a few years.”

BEL up 164% in 1 year 

The stock of Bharat Electronics has surged 164% in the past year and has given a massive return of 853% in the last five years. 

Bharat Electronics reported year-to-date order inflows of Rs 4800 crore, said JM Financial. “We expect Bharat Electronics to report a revenue growth of 10.5% year-on-year, (opening order book of Rs 75.9 crore), and EBITDA margins to expand 30 basis points year-on-year to 19.2%.” 

Garden Reach Shipbuilders up 314% in 1 year

Shares of Garden Reach Shipbuilders raised the investors’ wealth by more than 2100% in a time frame of five years. Garden Reach Shipbuilders has a market cap of Rs 29,746 crore as of July 11, 2024 and closed the stock price at Rs 2,595 apiece. In the last quarter of FY24 Garden Reach Shipbuilders posted a net profit of Rs 111.60 crore, a jump of 101.81% on year against Rs 55.30 it reported in Q3 of FY24. Also, the company’s sales jumped 69% on year to Rs 1,051.73 crore in the aforementioned quarter. 

Data Patterns up 71% in 6 months

While for Data Patterns the expectations are that the revenue will grow by 12%, with EBITDA margins expanding 370 bps on year, driven by the execution of high margins contract, said JM Financial.