Politics

Modi’s Poor Election Results Cause Defense Stocks to Nosedive, Say Analysts

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In the run-up to India’s hotly contested elections, defense stocks were soaring high, propelled by expectations of policy continuity under a Modi-led government. But as the results unfolded, revealing a coalition government, these stocks found themselves in a tailspin, nosediving amidst widespread panic on Dalal Street.A dramatic week unfolded in the Indian stock markets as the defense sector was caught in the crossfire of election fever.

At the onset of the week, following the release of exit polls for the Lok Sabha election 2024 in India on Monday, several PSUs and private defense companies experienced a surge in their stock prices.

Titans like Hindustan Aeronautics, Bharat Dynamics, BEML, and Bharat Electronics hit stratospheric highs on June 3rd June, riding the tailwinds of anticipated policy continuity. For instance, HAL shares soared by 9.45 percent, reaching Rs 5,444 per share on the NSE, while Bharat Electronics climbed over 9 percent to Rs 323 on the NSE.

However, on Tuesday, June 4th, the day of the Lok Sabha Election 2024 results, the stock market underwent a significant downturn, characterized by widespread panic selling during the trading session. On the same day, BEL and HAL stocks hit lower circuits three and four times, respectively.

Undoubtedly, the market reacted to the country’s future government and its anticipated future policies, as exit polls had projected a strong victory for the Modi-led NDA government, suggesting policy continuity.

However, the actual election results contradicted these projections. Even with the NDA in power, the Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, failed to secure an outright majority, indicating the formation of a coalition government.

This outcome triggered a decline in the stock market, including the defense sector.However, this was not the sole reason for the stock market’s negative reflection. While the hung parliament catalyzed the selloff, the overvaluation bugbear also reared its head.

“There was a significant price correction on Tuesday, and it might be surprising that the market rebounded on Wednesday by around 750 points on the Nifty. However, despite this, many Defense stocks remained down, including Bharat Dynamics, Cochin Shipyard, GRSE, and Midhani. It’s evident that this correction is specific to the sector,” stated Jatin Karani, market analyst and Co-founder of Samarthya Investment Advisors.

“When something is valued at such a high level, concerns arise regarding the continuity of policies. There were apprehensions that if a new government were to take office with a different agenda and policies, it could lead to uncertainty. Hence, this was the primary reason for the sharp correction, compounded by overvaluation,” explained Jatin.

The sector had soared to great heights fueled by the momentum of the Modi government’s Atma Nirbhar (Self Reliance) initiative.

The Atma Nirbhar Tailwinds

India’s steadfast progress towards defense self-sufficiency has been remarkable under Prime Minister Modi’s leadership. During his tenure, defense exports surged, driven by key reforms such as the Defence Acquisition Procedure 2020 and the introduction of indigenization lists.

India’s defense landscape underwent significant changes from 2014 to 2024 under the Modi government’s Aatmanirbharta initiative. Notably, according to the Ministry of Defence, defense exports have surged 31 times in the last decade compared to FY 2013-14.

Reforms like the overhaul of the Defence Procurement Procedure 2016, replaced by the enhanced Defence Acquisition Procedure 2020, aimed to bolster private sector participation and promote the indigenous design, development, and manufacturing of defense equipment. These measures proved crucial in reducing defense imports and boosting exports.

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“At the end of the day, the defense sector is primarily driven by government orders. Over the past decade, the policy direction has remained relatively consistent. The government’s emphasis has been on indigenization and procuring a greater share of defense products from domestic manufacturers while also encouraging exports,” remarked Jatin Karani.

To curb imports, the government introduced indigenization lists, with the Defence Procurement Procedure (DDP) issuing four Positive Indigenization Lists comprising a total of 4,666 items.

Additionally, the government’s efforts to increase Foreign Direct Investment (FDI) in defense led to a surge in inflows to ₹2,871 crore post-2014 from ₹1,320 crore a decade earlier, thereby supporting the ‘Make in India’ initiative.

These collective efforts by the government culminated in record-high defense exports of ₹21,083 crore (approx. $2.63 billion) in FY 2023-24, representing a 32.5% increase from the previous fiscal year’s ₹15,920 crore ($2B).

“Even in his victory speech on Tuesday, PM Narendra Modi reiterated that indigenization, defense production, and defense exports are core to his government’s agenda, even into his third term. The aim is to transition from being a defense importer to a defense exporter. Therefore, I don’t anticipate any changes in this regard. I believe the sharp correction we’ve witnessed is primarily due to overvaluation. Eventually, there will be a point of equilibrium where valuations become more rationalized, leading to a resurgence in stock performance. However, this correction is only temporary,” concluded Jatin.

Despite opening up the defense sector to private players, its dependency on government and government policies remains significant.

Contrary to market expectations, the BJP fell short of securing an absolute majority in Parliament in the 2024 Lok Sabha Election, acquiring 240 seats out of the required 272. However, the NDA surpassed the halfway mark, securing 293 out of the 543 seats. While it’s anticipated that the BJP-led NDA will form the next government, this outcome may impact policy decisions, continuity, and investor confidence.

“In India, defense stocks have encountered recent challenges stemming from various factors. These include political uncertainty and concerns regarding valuations. Despite the market’s volatility, the overall narrative of India remains intact; however, it’s crucial to maintain a long-term perspective. Pressure on defense stocks may persist until the market stabilizes,” said Amit Naik, a market advisor from Mumbai.

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India’s Prime Minister Narendra Modi in a Tejas LCA Mk1A jet cockpit.

Analyst Optimism Prevails

Despite the market’s ups and downs, analysts maintain a positive outlook on the defense sector. As the dust settles, analysts express optimism.

“In forthcoming quarters, the defense sector is going to thrive in India, positioning the nation as a key player in defense manufacturing and exports. Additionally, there will be significant emphasis on sectors like aviation and shipbuilding within the defense domain. However, the NDA government’s overarching goal remains consistent: to establish India as a manufacturing hub. The defense capital expenditure cycle will persist in the forthcoming months, ensuring that the focus on defense remains steadfast. Regardless of the ruling party, defense will remain a priority,” stated Kranthi Bathini, Equity Strategist at WealthMills Securities Pvt Ltd.

So, while defense stocks may face turbulence in the interim, the sector’s long-term trajectory seems secured – a reminder that in the arena of national security, battles are won through perseverance, not just firepower. The game of bullets and bulls promises more thrills ahead.

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