Shares of Hindustan Aeronautics Ltd (HAL) extended losses, falling over 3 per cent despite the aerospace and defence firm announcing a revised Memorandum of Understanding (MoU) with the Aeronautical Development Agency (ADA), bolstering their collaboration on the LCA AF Mk-2 program.
A sales note from InCred citing valuation concerns within defence stocks like HAL has likely spooked investors.
The brokerage compared HAL with its global peer Dassault Aviation. Dassault reported revenue of $5.19 billion with a profit of $974 million in the last financial year, while HAL posted revenue of $3.67 billion with a profit of $921 million during the same period.
However, HAL is trading at an enterprise value of $41 billion, compared to Dassault Aviation's $6.7 billion.
HAL was not the only defence stock trading in the red. Other stocks like Bharat Dynamics (BDL), Bharat Electronics (BEL), and Paras Defence were also under pressure, falling up to 5 per cent. The sell-off in the stocks recently has largely been attributed to profit booking and early jitters ahead of the budget.
Recently, Nirmal Bang downgraded HAL stock to 'sell' from 'buy', citing super-rich valuations. It also cut its price target on the stock to Rs 4,380 from Rs 5,469 earlier. Analysts believe that defence stocks like Mazagon Dock Shipbuilders, Paras Defence, and HAL may fall up to 20 per cent after a strong rally recently.
"We believe that 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," Nirmal Bang wrote in its note.
Although the brokerage remains structurally positive on the sector, the current steep valuations do not take into account the risks from a rise in raw material costs, competitive pressures, execution worries and cash flow generation, it added.
On the flip side, Antique maintained a 'buy' call on defence stocks such as HAL with a target price of Rs 6,145, BDL with a target price of Rs 1,643, BEL with Rs 339, and Bharat Earth Movers Limited at Rs 5,216.
According to the research firm, the steps taken by the government like the development of two defence corridors, 74 per cent foreign direct investment (FDI) under the automatic route and five PLI for defence items, which will promote making defence items domestically are positive for the defence stocks.
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