HAL, BEML: Record order flows great, but what about the execution? Is market getting a reality check now?

Shares of Hindustan Aeronautics (HAL) continued their slide for the fourth session in a row on Friday, August 2. The stock was trading 2.5% lower at ₹4,693.15 on the NSE in the early trade.

Instead of the anticipated 16 engines, GE is set to deliver only two F404-IN20 engines in September. This represents a shortfall of nearly 14 engines for the year, casting a shadow over the production timeline of the Tejas fighter.

This is expected to have a substantial impact on the company.

From the closing price of ₹5,030 on July 29 on the NSE, HAL stock has, till now (including today's price), slipped 6.69%.

Other defence stocks, too, have been witnessing a decline of late after being on a tear for the past 18–24 months. For instance, BEML shares were down nearly 1.5% at the time of writing this article. In the past one month, it has slipped 1%, and in the last five days, the scrip price has fallen over 3%.

Garden Reach Shipbuilders was trading at ₹2,319.30. Its 52-week high level is 2,833.80. Paras Defence and Space Technologies was trading 1.32% lower at ₹2,319.30 on the NSE. Its 52-week high price is ₹2,833.80, and the list continues.

Ambareesh Baliga, an independent market analyst, says that over the last 18–24 months, the market has discounted the order flows because the focus of the government has been on defence (Make in India). So, the story is fine until then. "All the stocks have become multibaggers. But nobody has been talking about execution. Everything was hunky-dory, but what about the execution risks?" the analyst says.

Execution is the key because there have been similar situations in the infrastructural and capital goods spaces too. Companies like L&T and BHEL have failed on execution at times. So, the same thing is happening to the defence sector.

Baliga continues, "The market has started taking a reality check, and at these valuations, the reality check would be quite drastic." The other issue is that if a company's order books have been full for so many years, how can it take more orders?