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During Wednesday’s trading session in the Indian equity markets, while the main benchmark indices Nifty and Sensex were trading in a strong range with a gain of more than 100 points, all-round selling pressure dominated the shares of domestic defense companies. Facing profit-booking for the fifth consecutive trading session, the ‘Nifty India Defense Index’ fell nearly 1 per cent during the trading session and slipped below the psychologically sensitive 9,000 level. Although some losses were recovered in the afternoon due to domestic institutional buying at lower levels and the index recovered and started trading slightly above the 9,100 level, but it continued to remain in the red compared to the previous closing level of 9,146. This sharp decline in five consecutive trading sessions has led to an overall decline of almost 10 per cent in the defense basket, raising concerns among retail and short-term traders who had bet on huge premiums in the recent bull run.
Defense index fell by 10% in five days: Round of profit booking after proposals worth ₹1.10 lakh crore
The technical and practical aspect of this sharp fall is that just before this there was a one-sided rise in defense stocks. Preliminary approval was given to huge defense procurement proposals worth about ₹1.10 lakh crore in the important meeting of the Defense Acquisition Council (DAC) held under the leadership of the Defense Minister on September 7. On the basis of this historic announcement, the defense index jumped by 2.5 percent on September 8. 98 per cent of these approved proposals were reserved for procurement purely from domestic Indian defense manufacturers under the ‘Make in India’ campaign, which included advanced electronic warfare systems, missiles, armored vehicles and surveillance systems for the Army, Navy and Indian Air Force. But soon after the excitement of this huge order pipeline, a cycle of ‘buy on rumour, sell on news’ started in the market. Wednesday’s weakness took the total decline to a serious level of 10 percent, after an 8.5 percent dive in the last four trading sessions.
Sharp fall of up to 5% in Apollo Micro and MTAR: BEL and Astra Microwave showed strength
If we look at the composition of Nifty Defense Index in Wednesday’s trading session, out of the total 19 major companies included in the index, more than 15 stocks were diving into the deep red. The highest selling was seen in midcap and smallcap defense component manufacturers. Apollo Micro Systems shares fell more than 5 percent, while MTAR Technologies shares slipped more than 4 percent. Shares of Solar Industries, active in the field of industrial explosives and missile propulsion, also recorded a weakness of more than 3 percent. Despite witnessing sharp losses in early morning trade, PSU major stocks like Hindustan Aeronautics Limited (HAL), Bharat Dynamics Limited (BDL) and Mazagon Dock Shipbuilders (MDL) managed to show smart recovery from lower levels and pare off major part of their intraday losses.
On the other hand, in contrast to the all-round negative market trend, two leading companies—Bharat Electronics Limited (BEL) and Astra Microwave Products—pleasantly surprised investors by trading in opposite directions. Shares of defense electronics and radar manufacturing maharatna company BEL saw a jump of more than one percent, while shares of wireless and radar sub-system maker Astra Microwave recorded a strong rise of about 3 percent. The strength in both these stocks indicated that instead of indiscriminate buying in the defense sector, investors are now giving preference to selected companies whose order books are completely strong and whose valuations are still around the historical average.
HSBC releases comprehensive research report: Confidence in long-term structural growth remains intact
Amidst this ongoing short-term pressure and sharp price correction in defense stocks, global financial firm HSBC has released its detailed coverage report on the Indian defense sector. HSBC clarified that the current decline is not a sign of fundamental weakness, but a natural and healthy technical correction of overly stretched valuations. According to the brokerage firm, a multi-year structural cycle of defense capital expenditure (Capex) has begun in India, supported by unprecedented domestic modernization and rapidly growing Indian defense exports globally. The government’s strong focus on import substitution and export of indigenous defense equipment to friendly countries will provide long-term strength to the revenue and EBITDA margins of these companies in the coming years.
HSBC’s technical report underlined that the pace of huge order cycle in defense electronics, aerospace manufacturing, advanced missile systems and especially unmanned aerial systems (drone and counter-drone technology) will increase in the coming times. Keeping this scenario in mind, HSBC has issued its detailed ratings on major defense sector stocks. The brokerage has given ‘Buy’ rating while expressing its top choice on Hindustan Aeronautics (HAL) and Bharat Electronics (BEL). On the other hand, we have initiated a ‘Hold’ opinion on the stocks that have seen a stormy rise in recent months—Bharat Dynamics (BDL), Astra Microwave, Data Patterns and Solar Industries—in view of limited upside. Additionally, coverage has been initiated with a recommendation of ‘Reduce’ on shipbuilding giant Mazagon Dock Shipbuilders citing extremely high valuations and potential margin pressure.
Way forward for investors: Is this the right time to buy defense stocks?
Market experts believe that this 10 percent fall in the Nifty India Defense Index in the last five days could present a better entry opportunity for long-term investors who were sitting on the sidelines due to the historic rally in defense stocks for the last one year. The grounding of DAC proposals worth ₹1.10 lakh crore and increased capital allocation for defense modernization in the coming budget sessions ensure that the order-to-bill ratio of companies will remain historically strong. However, analysts have cautioned small investors to adopt the strategy of buying in installments through systematic transfer or SIP rather than investing huge capital in lump sum, as the market may see limited volatility for some more time before geopolitical uncertainties and quarterly financial results.