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Informist, Friday, Aug 23, 2024

MUMBAI - Shares of defence-related companies are expected to fall next week owing to expensive valuations. However, flows from retail participants are likely to keep any fall limited even as several participants have pointed to exuberance in these stocks.

Shares of shipbuilding companies were major losers this week, where steep valuations pushed investors to sell these stocks. Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers declined over 10% each this week to 4,411.60 rupees and 1,764.75 rupees, respectively, on the National Stock Exchange.

The valuations of shipbuilding stocks are expensive and require further correction, Jyoti Gupta, research analyst at Nirmal Bang Institutional Equities, said earlier this week. The analyst had downgraded the defence sector to "sell" this month on extremely steep valuations relative to sector fundamentals. The margins of these companies are expected to remain rangebound for repeat orders, Gupta said. However, there is a chance for margin improvements for new orders, the analyst added.

ICICI Securities considered Mazagaon Dock as overvalued and assigned a target price of 1,165 rupees, indicating a fall of over 70% from current prices. "Despite factoring in the potential orders of P75 (three additional submarines), P75I and next-gen destroyers, and margins at an elevated level in the near term, we believe the stock is overvalued," the report said. This brokerage even drew some criticism online over their extreme views on the stock.

Apart from this, there are segments where analysts see value, although high valuations may cap upside. "Margin performance for EPC (engineering, procurement, and construction) players is expected to see an uptick from 2HFY25 (Oct-Mar) as newer orders booked at favorable prices come up for execution and input costs remain benign," Motilal Oswal Financial Services said in a report today.

Analysts expect order flow to also improve in the coming quarters with the General Election and the Budget behind. "The domestic enquiry pipeline is shaping up well and is expected to translate into firm orders," the brokerage said.

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Following are the resistance and support levels for the sector's key stocks for next week, as per calculations based on their prices on the National Stock Exchange:

End

Reported by Anshul Choudhary
Edited by Manisha Baxla

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