Cochin Shipyard, GRSE and Mazagaon Dock: Will these 3 defence stocks sustain high valuations?

Defence stocks such as Cochin Shipyard Ltd, Garden Reach Shipbuilders and Engineers Ltd (GRSE) and Mazagon Dock Shipbuilders Ltd are in focus following the Union Budget announcements. Analysts said a flat budgetary allocation for naval fleet indicates that any fresh orders for larger naval platforms look unlikely and that near to mid-term execution and order inflows would now be key to sustain higher valuations.

The three stocks had rallied in anticipation of additional announcements for Navy in the Budget but Elara Securities believes the budget allocation failed to live up to the high expectations. The three stocks gained up to 644 per cent in the past one year.

"The allocation to naval fleet hasn’t changed from what was laid out in the interim Budget, while that to heavy and medium vehicles rose 12 per cent. Although custom duty was pared for components and consumables used in making specified vessels and spare parts for warships, and is positive long-term, near to mid-term execution and order inflows are key considerations to sustain the high valuations currently built in," the brokerage said.

ICICI Securities said the flat budgetary allocation for naval fleet indicates that ongoing execution will proceed but any fresh
orders for larger naval platforms look unlikely. The delay in orders of high value naval fleet, it said, is negative for Mazagon Dock and GRSE.

MOFSL said the Budget announcements were neutral for defence sector. Kotak Institutional Equities said the naval fleet procurement capex was down 2 per cent YoY, which is slight negative for likes of Cochin Shipyard. It noted that a majority of increased capex spend is towards aircraft equipment.

Avoid adding to positions in overbought themes like defense, railways, and select PSUs, and use any recovery to reduce exposure in loss-making trades, said Ajit Mishra, SVP, Research, Religare Broking.

The defence sector allocation stood at Rs 1.8 lakh crore, which was an increase of 8.6 per cent over FY24's revised estimates of Rs 1.67 lakh crore. It was the same as FY25 interim Budget estimate. HDFC Institutional Equities said the order pipeline will be strong as major allocation has been in aircrafts and aeroengines. It is seen positive for L&T, Bharat Dynamics (BDL), Bharat Electronics Ltd (BEL), Hindustan Aeronautics Ltd (HAL), Mazagon Dock, GRSE and Cochin Shipyard.