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Defense stocks on a roll; BDL, BEL, HAL, Cochin Shipyard rally 5%

The Government of India's initiatives to make India self-reliant in providing weapon systems to the Indian Armed Forces and clearance for export to FFCs have opened plenty of opportunities for defense

Illustration: Binay Sinha

Illustration: Binay Sinha

Deepak Korgaonkar Mumbai

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Shares of defense and related companies were on a roll with Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Bharat Dynamics (BDL), Data Patterns (India), Cochin Shipyard and Mazagon Dock Shipbuilders rallying up to 5 per cent on healthy outlook. These stocks continued their northward march and quoting at their respective record highs.

The Government of India’s initiatives to make India self-reliant in providing state-of-the-art weapon systems to the Indian Armed Forces and clearance for export to Friendly Foreign Countries (FFCs) have opened plenty of opportunities for defense companies to grow and expand into the market.

These companies are favourably positioned to capture the larger pie of huge opportunity in Indian defence & space electronics systems/sub-systems or components industry. The emphasis of the Government on the coastal shipping/ inland waterways space as also in developing ship repair clusters in the country, all augurs well for the shipbuilding companies.

The large spending plan by the Indian Navy is expected to drive the order book of the Indian shipbuilding companies and more so for the CPSU shipyards. The capital budget for the Indian Navy has been forecasted at about Rs 4.5 trillion crore (until 2027), which comprises a mix of various vessel categories, viz., submarines, destroyers and frigates, aircraft carriers, corvettes, landing platforms, etc. With large-sized capex plans by the government, the order book of shipyards is expected to remain strong, according to analysts.

Among individual stocks, HAL hit a new high of Rs 4,744.80, the stock rallied 5 per cent on the BSE in Saturday’s intra-day trade. In past three trading days, the stock of state-owned defense company has surged 13.5 per cent after the company posted a solid 52 per cent year-on-year (YoY) jump in its consolidated net profit at Rs 4,308.68 crore for March quarter.

The state-owned defence company had posted a net profit of Rs 2,831.19 crore in Q4FY24. On sequential basis, net profit more-than-doubled from Rs 1,261.51 crore in December 2023 quarter (Q3FY24). Total income from operations grew 18.2 per cent YoY to Rs 14,768.75 crore from Rs 12,494.67 crore.

In the past six trading days, HAL stock has zoomed 23 per cent after brokerage firm UBS raised its price target of the stock from Rs 3,600 to Rs 5,200. Analysts believes this is justified by HAL's better order book scale up, lower competition and greater optionality in exports.

HAL, one of the largest Defence PSU in India, is engaged in design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aeroengines, avionics, accessories and aerospace structures.

Analysts at UBS forecast a threefold increase in HAL's order book and 25 per cent revenue growth in the manufacturing topline (50 per cent of revenue) in FY23-27E. This would be led by a pick up in large military orders due to a depleting fleet, a robust supply chain and ready capacity.

Meanwhile, the Ministry of Defence (MoD) has issued a tender to HAL to procure 97 more indigenous LCA Tejas Mk1A aircraft, the largest order for homegrown military hardware in India. Tender size is estimated to be worth Rs 65,000 crore. These are additional LCA Mk1A are likely to replace the ageing fleet of Mig-21 and Mirage 2000 aircraft in the Air Force. Order backlog reaches 186 (83+97+6 trainers) LCA Tejas Mk-1A aircraft. LCA Tejas is set to become the second-largest fighter aircraft fleet at ~225 in the Air Force after the Su-30.

Analyst at Elara Securities believe rising share of indigenization along with unexplored exports opportunity in the aircraft & helicopter industry warrant a rerating. The brokerage firm expects an earning CAGR of 17 per cent during FY23-26E with a ROE of 24 per cent during FY24-26E. “Key risks to our call include lower spend in the defence capital budget, less domestic procurement allocation, increased competition from the private sector, and a significant increase in commodity prices,” the brokerage firm said.

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First Published: May 18 2024 | 12:18 PM IST

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