market expectations: Sudip Bandyopadhyay flags valuation risks in defence stocks after Mazagon Dock miss

“Look at companies like UltraTech Cement. They have performed very well, much better than market expectations. Yes, monsoon is not a time for cement, but in spite of that market is appreciating the performance of some of these large companies,” says Sudip Bandyopadhyay, Group Chairman, Inditrade Capital.

Give us a sense of what you have made of the earning season gone by. Now that has finally come to an end for us and when I take a look at the earnings scorecard, you have only seven Nifty companies so far that have performed below earnings estimates at least compared to the ET Now estimates with 13 above, 20 in line, and 9 mixed coming in. So, it has not been all that bad like the street was estimating before the beginning of the season. Give us a roundup on what you think has happened when it comes to the earnings and your takes on that.
Sudip Bandyopadhyay: Well, you are absolutely right, compared to Q3, Q4 earnings were much-much better and as you rightly said, this was much better than even what was being expected. So, we should take note of the fact that companies have performed by and large better than market expectations. Let us look at cement. This is one sector which has performed uniformly well. Look at some of the FMCG companies, they have performed well. Some of the construction and engineering companies, they have done well. And also, I would say if you want to specify companies, look at how some of the other names in the building material and textiles, even technology, some of the technology companies have performed better than what was being expected. So, by and large, it has been a good set of numbers. Amongst the recently announced numbers, some of the defence companies have disappointed and we have been saying for quite some time that the defence sector valuation is at such level that margin of error is very-very limited.

So, a Mazagon Dock slipping on margin definitely will attract negative attention of the market and that is what getting played out now. Q4 numbers of company like a Mazagon Dock was not good, it was a darling of the market. On the other hand, look at the wind energy company Suzlon, they have performed much better than what was being expected. The management commentary was very bullish and very positive. So, market has been rewarding it. Look at companies like UltraTech Cement. They have performed very well, much better than market expectations. Yes, monsoon is not a time for cement, but in spite of that market is appreciating the performance of some of these large companies.I was coming to you for this because Mazagon Dock reported its quarter four numbers and, of course, the fall in the stock price post the results. I wanted to ask, is really the party over for all the defence companies right now because they had run up quite a bit and, of course, after operation Sindoor they were running up on very high valuations and now that the results have been a disappointment, is the party really over in the defence space?
Sudip Bandyopadhyay: Well, the party was carrying on for much more than what was warranted. You see, the whole issue is the valuation. There is absolutely no doubt in the fact that some of these companies are very good companies and there is absolutely no problem in they are gaining in more and more orders, the order book is full, and they will keep getting orders. The challenge comes in execution. Look at Hindustan Aeronautics, HAL. Look at the order book, it is bulging and it is continuously increasing. The management is also very confident of new orders coming in. But look at the guidance on topline revenue growth, about 8%. Now, in 8% topline growth cannot command the kind of valuation it is commanding, that is where the challenge is.

So, we have to be very cognisant of the fact that you are looking at a rich valuation and if somebody is getting in at these valuations, they should be aiming for a long haul. You should not expect quick returns in this segment. The only company where I expect a re-rating in the near future is Bharat Electronics. This is a fantastic company. Electronics in defence is the key thing nowadays.

They cater to air force, army, navy, all three wings of the armed forces. Adjacencies like metro network, they have got into, export market has opened up, strong balance sheet, good execution. Last year, the order inflow was below expectations, but that is going to get corrected surely this year. So, some kind of re-rating at some stage during the current fiscal is possible and investors can look at buying into BEL even at current levels.