Cochin, Mazagon Dock & BEL overvalued, caution advised: Emkay's Manish Sonthalia; backs this PSU

Manish Sonthalia, Director & CIO at Emkay Investment Managers, said select defence stocks such as Cochin Shipyard Ltd, Mazagon Dock Shipbuilders Ltd and Bharat Electronics Ltd (BEL) were trading at single-digit price-to-earnings (P/E) ratios during the Covid period, but are now commanding steep valuations in the 60–70 P/E range. "Those were times of deep value; today, it's more about extreme euphoria and froth. Investors should exercise caution," he told Business Today on Monday.

"Currently, India is allocating around 2 per cent of its GDP (gross domestic product) to defence spending. Following Operation Sindoor, the government announced emergency procurements worth Rs 40,000–50,000 crore. As a result, the defence budget may move closer to 2.5 per cent of GDP. If that happens, defence PSU stocks could continue to rally, despite already trading in overvalued zones," Sonthalia noted.

He cautioned that the revenue impact from many of these defence orders would only materialise after a lag of three to four years. Moreover, he flagged concerns over the sustainability of high-profit margins in the sector. "Given that the government is the primary buyer, it is unlikely to allow defence PSUs to enjoy supernormal margins. So while growth is expected, it should be viewed with some caution -- especially in light of the current overvaluation," he said.

Instead of the headline PSU giants, Sonthalia sees more investment merit in smaller defence players. "I would prefer Tier-II and Tier-III vendors over Tier-I PSUs in the defence space, where there's a better chance of finding value. The entire sector has been re-rated, but the frothy valuations call for a cautious approach," he added.

Among the defence-related companies, he sees relative value in Mishra Dhatu Nigam Ltd compared to its private sector peers. "This is one stock we hold in our portfolio as it offers reasonable value versus private competitors," he said.

Separately, the market expert expects domestic benchmark indices to break past previous highs, expressing optimism that new record levels could be achieved in the near future.