Defence sector stocks came under pressure on Thursday as investors booked profits following a sharp three-month rally. The Nifty India Defence Index dropped 2%, lagging the broader Nifty which ended 0.5% lower.Out of the 18 stocks on the defence index, 16 closed in the red. Bharat Dynamics was the biggest loser, falling 4.8% to Rs 1,893 after Motilal Oswal initiated coverage on the stock with a ‘neutral’ rating and a target price of Rs 1,900, suggesting limited upside.“We like the business model of BDL and its ability to scale up its revenues and order book in the current scenario; however, with fair valuations, we would look for lower price points to enter the stock,” analysts at Motilal Oswal said, quoted ET in a report.Other top laggards included Solar Industries, which lost 3.3%, and Zen Technologies, down 2.9%. Data Patterns, Astra Microwave, and Garden Reach Shipbuilders fell more than 2.5%. Hindustan Aeronautics declined 1.9%, while BEML and Paras Defence & Space Technologies were down 1.4% each.Some Retreat in Defence Stocks

Source: ET reportAnalysts said the correction was triggered by stretched valuations and cooling geopolitical tensions. “The fall in defence stocks today was largely due to profit booking and easing of geopolitical tensions,” said Pranay Aggarwal, director and CEO of Stoxkart. “Given the strong rally in the stocks, the corrections were bound to happen.”The Nifty India Defence Index had surged 42.2% in the past three months, far outpacing the Nifty’s 13.2% gain. The strong momentum revived concerns over high price-to-earnings multiples, with some stocks trading at nearly 60 times earnings — well above their historical averages.“The correction was due to overvaluation in the defence stocks as the sector is trading at around 60 times price to earnings, which is significantly higher than the historical average,” said Ashwini Shami, EVP and portfolio manager at OmniScience Capital. “The growth in the defence companies is already priced in the stocks; so unless the companies continue to deliver 18–20% growth, sharp declines are likely.”He added that “further falls cannot be ruled out due to premium valuations.”Despite the correction, fund managers remain optimistic about long-term growth prospects. “Some of the companies can witness 70–80% growth in order inflows, which is expected to justify the valuations, especially given the significant export opportunities in the next three to five years,” said Bhalchandra Shinde, associate fund manager at Motilal Oswal AMC.Shinde recommended a buy-on-dips strategy for investors, noting that the defence segment may trade sideways in the coming months. “Stocks are likely to remain sideways for the rest of the year since there are no major events in the July to December period for the sector and most orders are secured between January to March,” he said.(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)