Defence shares have generated substantial wealth for their investors over the past five years. The Indian government has been taking steps to encourage local defence production and reduce dependence on foreign imports. The Indian defence industry has achieved notable progress in developing advanced technologies and systems, including missile defence systems, fighter aircraft, submarines, and unmanned aerial vehicles. Both state-owned and private defence companies in India play a crucial role in the production of defence equipment and supplies.
In the Union Budget for 2023-24, the government increased the capital allocations for modernising and developing infrastructure for the Defence Services to `1,62,600 crores, showing a rise of 6.7% from the previous fiscal year. Furthermore, the Ministry of Defence aims to achieve a turnover of `1.75 lakh crore in aerospace and defence manufacturing by 2025. Despite these developments, defence stocks have seen a decline in recent days. Let’s find out the reasons behind this decline.
In anticipation of better fundamentals, investors have been aggressively purchasing defence stocks. Many stocks within this sector have seen a surge in value, ranging from 5x to 20x over the last three years. However, earnings have not kept pace with this growth, leading to these stocks being overvalued. This overvaluation has slowed down the pace of incremental buying.
On the other hand, mutual fund managers have strategically sold off their defence stock holdings due to concerns over rising valuations. The most recent data on shareholding patterns indicates that mutual funds are reducing their positions in numerous defence stocks.
For investors, the primary question remains: what should our strategy be? Defence stocks have seen a significant correction from their 52-week highs, yet their valuations remain high. Therefore, it’s reasonable to expect a time correction in these stocks. The defence sector in India is undoubtedly a promising area, with excellent prospects. However, it’s essential to seize this opportunity while managing risk. Investors can take advantage of this current situation by investing in defence funds through systematic investment plans (SIPs).
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