Nirmal Bang Institutional Equities has suggested a 'Sell' call on defence sector, as it cut ratings on five out of eight stocks that it tracks, with four shares namely Mazagon Dock Shipbuilders Ltd, Bharat Electronics Ltd (BEL), Hindustan Aeronautics Ltd (HAL) and Paras defence & Space Technologies Ltd receiving 'Sell' call from the brokerage.
Nirmal Bang said even after assuming extremely strong earnings growth, return on equity (ROE) estimate for FY26 stands at 10-30 per cent for its coverage stocks, making it difficult for it to justify exorbitant multiples. It suggested up to 22 per cent downside ahead for five defence names.
The defence stocks under Nirmal Bang's coverage delivered 58 per cent returns in the last three months, 75 per cent returns in the last six months, 148 per cent returns in the last 12 months and 776 per cent returns in the last three years, buoyed by healthy order books, revenue expansion and the government’s major push for indigenization in the
"We prefer to remain on the sidelines until valuations return to reasonable levels. We therefore downgrade the Defence sector to SELL. Our new target multiples of around +2SD for most coverage stocks adequately capture the growth opportunities in the sector," it said.
The brokerage cut its target price on Astra Microwave Products to Rs 894 from Rs 968 earlier. It reduced its target for Bharat Dynamics to Rs 1,508 from Rs 1,563. The price target for BEL has been slashed to Rs 256 from Rs 328, suggesting a potential 22 per cent downside. Targets for Data Patterns (Rs 3,017 from Rs 3,226) and HAL (Rs 4,380 from Rs 5,469) have also been reduced, Nirmal Bang said.
Nirmal Bang said the exuberance around the defence sector has been built solely around strong order books for assigning high valuations. Therefore, the conventional financial metrics do not fully capture the industry's true value, particularly cyclicality, profitability and efficiency.
While it remains structurally positive on the defence sector, it felt the current steep valuations do not take into account the risks from execution hiccups, rise in raw material costs, competitive pressures and cash flow generation.