Hindustan Aeronautics Ltd (HAL), Bharat Electronics Ltd (BEL), Cochin Shipyard Ltd, Bharat Dynamics Ltd (BDL), Data Patterns India Ltd, BEML Ltd and Mazagon Dock Shipbuilders Ltd are among defence stocks in limelight today. The Finance Nirmala Sitharaman will present Union Budget 2024 later at 11 am, where hopes are she may announce higher allocation towards the sector.
Investors are expecting defence capital outlay to grow at 12-15 per cent YoY, as the government looks to give systems modernisation and infra development a boost, given its focus on indigenisation and exports ramp-up. Nuvama Institutional Equities expects defence capex to be increased by 5-8 per cent on YoY basis with higher allocation towards UAV/drones, research & development (R&D) and anti-drone systems, noting some key large systems are already in the pipeline.
Such an announcement could be bring a slight pessimism in the market in the short-term but the brokerage believes long-term outlook remains intact for the defence sectors as orders from Ministry of Defense would continue to flow.
The Finance Minister Nirmala Sitharaman had in her interim Budget announced a budgetary allocation of Rs 1.72 lakh crore towards FY25 defence capital expenditure, which was 20.33 per cent higher than the actual expenditure of FY23 and 9.40 per cent more than the revised allocation of FY24.
Cochin Shipyard Ltd has delivered 700 per cent return in the past one year, with the stock closing at Rs 2,671.80 level on Monday against the year-ago's Rs 334.15 level. Mazagon Dock Shipbuilders Ltd, BEML Ltd, HAL and BDL delivered 150-200 per cent returns during the same period.
"When compared to historical performance, the current price-to-earnings (P/E) ratios of defence stocks appear elevated. This raises concerns about whether these stocks are overpriced. High valuations often come with the risk of market corrections, particularly if companies fail to meet the high expectations set by investors. While the defence sector’s reliance on government contracts provides long-term revenue streams and stability, any adverse changes in government policy or budget allocations can significantly impact these stocks’ performance," said Rohit Sarin Co-Founder Client Associates.
Sharekhan has HAL, BEL and Bharat Forge as its preferred defence picks ahead of the Budget.
The upward trend continues in defence capital expenditure as the government is promoting ‘Aatmanirbharta’, with the defence budget likely to grow to $200 billion by 2030, said Mehta Securities.
This brokerage has HAL, BDL, ZEN Technologies Ltd and Data Patterns Ltd as it preferred picks going into the Budget 2024.
Despite boasting the world’s fifth-largest defence budget, India sources a 60 per cent of its weapon systems from international markets, it said. "Indian government is trying to strengthen the nation’s defence prowess by reducing dependence on imports. Large and sustainable opportunities for domestic players also exists particularly in engineering services and component sourcing, on backdrop of goal of reaching 50,000 crore in exports by 2029-2030)," it said.
Prabhudas Lilladher expects higher allocations towards aircraft, engines, and vehicles. Ministry of Defence will also continue its thrust on exports, having announced a Rs 50,000 crore defence export target by FY29, it said.
This brokerage said India's defence story remains intact due to unrelenting focus on enhancing domestic production capabilities, improving technology of arms and armaments and push for exports. It sees increased order inflow in segments like fighter aircraft, helicopters, armoured vehicles, missiles and naval platforms. Each platform will require new electronics such as advanced avionics, radars, fire control systems, as well as various ancillary equipment, it said.
PL said a sustained focus would keep defence stocks such as HAL, BEML, BEL, Mazagon Dock Shipbuilders, Bharat Dynamics, GRSE, Data Patterns and Cochin Shipyard buzzing.
Ahead of the Budget 2024, MOFSL initiated coverage on Zen Technologies, calling it a niche player in the defense simulator-based training market.
"The company has also forayed into the counter-drone market. The addressable markets for simulators and counter-drones in India are estimated at Rs 14,000 crore and Rs 12,000 crore, respectively, over the next five years. The company commands a significant market share in both of these segments, with just 2-3 players in the defense simulator market and 5-6 players in the counter-drone market," it said.
Fisdom Research said stocks such as BEL, HAL and DDL to be on investor radar.