Nirmal Bang Predicts Potential 20% Correction in Defence Stocks

Defence Stocks Might See a 20% Drop Post-Rally: Insights from Nirmal Bang

In a recent note, Nirmal Bang, a reputable brokerage firm, has projected that defence stocks such as Mazagon Dock Shipbuilders Ltd., Hindustan Aeronautics Ltd. (HAL), and Paras Defence Ltd. Could experience a downturn of up to 20% following a robust rally. This comes after notable gains that these stocks have witnessed, leading to significant corrections.

Recent Performance and Current Corrections

Hindustan Aeronautics has seen a near 10% drop over the past two trading sessions. Similarly, Mazagon Dock and other comparable stocks have also declined from their recent peak levels. The note highlighted that defence stocks under Nirmal Bang’s coverage have delivered remarkable returns: 58% over the last three months, 75% in six months, and an impressive 776% over three years. These returns have been driven by strong order books, revenue growth, and a substantial push for indigenisation by the Indian government.

High Valuations and Financial Metrics

Nirmal Bang cautioned that the current exuberance in the defence sector might be inflated by the strong order books, which are used to justify high valuations. They noted that traditional financial metrics might not fully capture the true value of the industry, particularly considering factors like cyclicality, profitability, and operational efficiency.

Stock Ratings and Target Price Adjustments

Here are the revised ratings and target prices for some of the key defence stocks:

1. Mazagon Dock Shipbuilders Ltd.

Rating: Downgraded to Sell (from Accumulate)

Old Target Price: ₹3,724

New Target Price: ₹4,143

2. Hindustan Aeronautics Ltd. (HAL)

Rating: Downgraded to Sell (from Buy)

Old Target Price: ₹5,469

New Target Price: ₹4,380

3. Bharat Electronics Ltd. (BEL)

Rating: Downgraded to Sell (from Buy)

Old Target Price: ₹328

New Target Price: ₹256

4. Paras Defence and Space Technologies Ltd.

Rating: Downgraded to Sell (from Accumulate)

Old Target Price: ₹916

New Target Price: ₹1,181

5. Bharat Dynamics Ltd. (BDL)

Rating: Maintain Accumulate

Old Target Price: ₹1,563

New Target Price: ₹1,508

Despite maintaining a positive structural view on the defence sector, Nirmal Bang argued that the current steep valuations do not adequately reflect risks such as rising raw material costs, competitive pressures, execution challenges, and cash flow issues.

Challenges in Justifying Valuations

The brokerage emphasized that even with strong earnings growth projections, it is challenging to justify the high multiples. For instance, the Return on Equity (RoE) multiples for the financial year 2026 range between 10% and 30% for the covered stocks. This led Nirmal Bang to downgrade the defence sector to a ‘SELL’ rating, recommending staying on the sidelines until valuations become more reasonable.

Key Risks for the Defence Sector

Several risks were highlighted, including changes in the global economic and political landscape, project execution delays due to technical complexities and bureaucratic hurdles, shifts in government policies, and geopolitical uncertainties. Chris Wood from Jefferies also pointed out the potential impact of political changes, such as a possible resolution to the Russia-Ukraine conflict if Donald Trump returns to power, which could result in a correction in defence stocks.

In Conclusion, Nirmal Bang’s forecast suggests that defence stocks might be heading towards a period of correction due to their recent rally and current high valuations. Investors should consider these factors and the associated risks before making investment decisions in the defence sector.