The Indian stock market has seen significant fluctuations recently, and public sector undertaking (PSU) stocks, which once soared to unprecedented heights, have found themselves at the center of a sharp downturn.
Following an impressive rally in the first half of this year, defence PSU stocks, in particular, have been unable to escape the impact of the broader market sell-off. Despite some recovery in Tuesday’s session, these stocks are currently trading at multi-month lows, sparking concerns among investors about the sector’s immediate future.
Defence Stocks Hit Hard
One of the most notable aspects of the recent sell-off has been the drastic decline in defence PSU stocks, many of which are now trading at levels unseen in the past six months.
As the broader market surged to record highs earlier this year, led by gains in energy, financial services, and technology stocks, the same rally failed to materialize for defence PSUs. Over the past few months, these stocks have witnessed a steady decline, culminating in the sharp correction triggered by the latest market sell-off.
Cochin Shipyard is one of the biggest losers in this sector, with its stock trading at a significant 45% discount from its all-time high of ₹2,979, reached in July. Following a 28% drop in August and an additional 7.75% fall in September, the stock now sits at ₹1,643 per share, marking a six-month low. The decline in Cochin Shipyard’s stock price mirrors the broader trend in the defence sector, where several major companies have suffered similar fates.
Garden Reach Shipbuilders & Engineers has seen its stock fall 41% from its all-time high, while Mazagon Dock Shipbuilders has declined by 30.36% from its peak of ₹5,860, now trading at a four-month low. Other key players, including Bharat Dynamics, Bharat Electronics, Hindustan Aeronautics, and BEML, have also experienced steep declines, with their stocks down as much as 36% from their recent highs.
Market Valuations and Investor Sentiment
The sharp rise in defence PSU stocks earlier this year was fueled by consistent order wins, which highlighted the sector’s growth potential. The formation of a BJP-led NDA government at the center also reassured investors, as the government’s defense policies provided much-needed stability for these companies. However, as the market has progressed, analysts have cautioned against the elevated valuations that have been driving the sector, warning that a correction was inevitable.
Many of these stocks saw their values soar more than tenfold in the last 24 months, prompting some market watchers to believe that the sector was overvalued. The current downturn appears to be a result of profit-taking, as investors seek to capitalize on their earlier gains.
According to Aman Soni, Head of Operations at Prudent Equity, “The recent downturn in defence stocks is a classic example of the saying, ‘the bigger they are, the harder they fall.’ After seeing significant rises over the past 24 months, some of these stocks were bound to experience a correction. A 25-30% decline from peak levels is not unusual, and it’s largely due to routine profit-taking by investors.”
Soni also highlighted that many of these stocks were trading at elevated valuations for some time, making the correction inevitable. He urged investors to exercise caution, advising them to avoid jumping into these stocks in hopes of a quick recovery. “It may take years for some of these stocks to regain their previous highs,” Soni added.
Should Investors Buy the Dip?
With defence PSU stocks trading at multi-month lows, the question on many investors’ minds is whether now is the right time to buy the dip. Analysts, however, are advising caution. While the recent sell-off may present an attractive entry point for some, the risks associated with these stocks remain high.
Soni emphasized that while some investors may be tempted to take advantage of the recent decline, it’s important to avoid falling into the trap of “bottom fishing.” He explained that investors should focus on proper sector allocation and avoid rushing into these stocks based on their current low prices.
“In every bull cycle, the leaders of today are not always the leaders of tomorrow. Investors often fall into the trap of recency bias, allocating capital to stocks with high valuations, which can be risky in a volatile environment,” Soni said.
Other analysts echoed Soni’s sentiment, cautioning investors against assuming that the recent decline is a temporary setback. With market volatility expected to continue in the near term, defence PSUs may remain under pressure, particularly if broader market conditions do not improve.
Cochin Shipyard’s Plunge and Broader Implications
The case of Cochin Shipyard, which has lost nearly half its value since July, is a stark reminder of the volatility in the defence sector. Despite its role as a major player in India’s shipbuilding industry, the company’s stock has been caught up in the broader sell-off, leaving investors questioning its future prospects.
The decline in Cochin Shipyard’s stock price highlights a broader issue in the defence sector: while these companies are essential to India’s defense capabilities, their stock performance is often subject to market fluctuations. As the market continues to correct itself, defence stocks may remain vulnerable to further declines.
Long-Term Outlook for Defence PSUs
Despite the recent downturn, the long-term outlook for India’s defence PSUs remains positive, particularly given the government’s focus on self-reliance in defense manufacturing. However, in the short term, these stocks are likely to remain volatile as the market adjusts to changing valuations.
Investors looking to invest in the defence sector should adopt a more strategic approach, focusing on long-term growth potential rather than attempting to time the market. As the sector continues to evolve, there may be opportunities for growth, but patience and caution will be key to navigating the current market conditions.
