Defence stocks trading at valuations comparable to consumer sector firms. Should you Buy, Sell or Hold the stocks?

Stock Market Today: Defence Sector associated companies as Hindustan Aeronautics Ltd, Cochin Shipbuilders, Mazagaon Docks, Bharat Dynamics, ZEN Technlogies ltd, Astra Microwave products, Mishra Dhatu Nigam and others have seen sharp rise in share prices, of up to 250% during past one year. On an  average12 defence companies have given returns of 105 % during last one year as per Bloomberg. 

However after sharp run up in the share prices, the stocks are commanding high valuations too.  Astra Microwave Products, Mishra Shatu Nigam, MTAR Technologies, Data patterns India, Solar Industries India shares are trading at Price to earnings ratio of 55-68 times FY24 price to consensus earnings estimates as per Bloomberg.  Bharat Dynamics while is trading at 45.12 times FY24 price to earnings ratio, Cochin Shipyards, Bharat Electronics , Hindustan Aeronautics, Mazagaon docks are trading at more than 30 times FY24 price to earnings.

These valuations are comparable to valuations commanded by Fast moving consumer companies. Hindustan Unilever, Colgate Palmolive, Britannia Industries are trading at 50-55 times FY24 estimated  price to consensus earnings  ratio as per Bloomberg, Marico is trading at 45 times PE.

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What justifies the run up in defence sector stock prices and valuations is the fact that earnings visibility remains strong said Deepak Jasani , Head of Research at HDFC Securities Ltd . The order book is strong and is likely to rise regularly, Book to Bill ratio is favorable; Government focus in Atmanirbhar Bharat will help keep driving order book , further the export sales are rising with higher export opportunities. 

The factors favorable for Public sector undertakings in defence sector are also that they have good past track record and being PSU's will be more trusted for Defence orders compared to private sector companies who may also get some smaller share.

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Jasani thereby feels that the share prices of Defence sector stocks may not correct sharply.

Chokkalingam G Founder, Equinomics Research Pvt Ltd said that it has been a perception driven rally in defence stocks. The momentum stocks are being followed by investors. However at current levels investors can book profits gradually. There is no hurry but profits can be booked gradually.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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