Investor interest in defence stocks soars amid India-Pak military tensions

Synopsis

Renewed India-Pakistan tensions have sparked investor interest in Indian defence stocks, with companies like Cochin Shipyard and Bharat Dynamics seeing significant gains. Anticipation of increased defence spending and potential export opportunities are driving this surge. While long-term prospects remain strong, some fund managers caution about the current elevated valuations and the pace of the rebound.

Mumbai: The India-Pakistan military conflict has reignited investor interest in some of the country's largest defence companies.

Shares of Cochin Shipyard, Bharat Dynamics, Mazagon Dock Shipbuilders, and Paras Defence and Space Technologies surged between 10% and 35% since April 22-when the terrorist attack in Pahalgam happened, leading to the fighting between India and Pakistan. Nifty India Defence index went up nearly 13% as investors bet that the government may look to boost defence spending again.

"Post the recent cross-border tension between India and Pakistan, defence stocks moved in anticipation that India will have to not only replenish its inventory of equipment but also order new ones to keep up its technological edge," said Mahesh Patil, CIO, Aditya Birla Sun Life AMC.

"Owing to this, the likelihood of an increase in defence budget could rise faster over the next few years. In addition, it could also open an opportunity for India to export some of the equipment."

Analysts said defence companies have enough on their plates. Antique Stock Broking said between FY22 and FY25, the Defence Acquisition Council (DAC) cleared military procurements worth ₹8.45 lakh crore, which is 3.3 times the value approved three years ago. The brokerage said these approvals are expected to convert into actual orders and business opportunities by FY26 and FY27.

Agencies

The government's focus on the sector resulted in one of the strongest rallies in shares of defence companies, with the Nifty Defence index shooting up about 350% between July 2022 and July 2024, when these shares peaked out. Subsequently, the index fell 38% till February-end amid the risk-off sentiment in Indian equities that hit the best performers in the previous years the most.

Though the sector prospects remain strong, fund managers are wary about the pace of the rebound in these shares.

Agencies

"While the long-term structural opportunity in the sector remains intact, there is a disparity between current elevated levels and short-term fundamentals," said Patil. Umeshkumar Mehta, CIO, Samco Mutual Fund, said better visibility on the government's focus on the sector is keeping the valuations elevated for the sector.

"In the near term, there might be a sharp elevation in terms of stock prices, but in the longer term, the sector is bound to deliver earnings growth considering the focus of the government in the sector," said Mehta.

Antique continues to be positive on Mazagon Dock and Garden Reach Shipbuilders & Engineers (GRSE). On Cochin Shipyard, it said, "The stock price outlook for Cochin Shipyard is closely tied to the ordering of an aircraft carrier (IAC-II) on which there is lack of consensus over the urgency and size of the vessel, driving us to temper our stance on the stock."

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