The defence manufacturing sector has seen a massive re-rating and the confidence in multi-year growth opportunities has further magnified, justifying prevailing valuations, said Antique Stock Broking. Given the long-term potential of the Indian defence manufacturing sector, valuations of stocks at 24-25 times FY25 earnings are not stretched by any means, the brokerage said.
Antique said it continues to maintain its positive stance on companies like Bharat Electronics, Bharat
Dynamics, Hindustan Aeronautics, Mazagon Dock, and GRSE. "We believe the emerging companies from the private sector offer exponential growth potential and hence must be looked at from a long-term investment point of view," it said.
Antique said India has been one of the top five defence spenders globally, with the government spending 2.5-3 per cent of the GDP on the defence sector annually. India's defence capex has been growing at 9.5 per cent CAGR over FY17-24E and with the Atmanirbhar Bharat clarion call, opportunities for domestic defence players have witnessed significant growth with 75 per cent of the defence capital outlay being reserved for domestic players as compared to 49 per cent in FY21, it said.
"The defence capital outlay is expected to remain strong in the near to medium term given the geopolitical challenges that India faces and also the country intends to modernise its Armed Forces to meet future challenges. India intends to place orders worth Rs 8.3 lakh crore through domestic procurement and thus it presents a massive business opportunity for local players," it said.
Here's what the brokerage said on defence stocks:
Hindustan Aeronautics
HAL's business prospects stand superlative given that India is in the midst of modernising its armed forces due to obsolescence and the geopolitical situation. This should lead to strong ordering for fighter aircrafts and helicopters, along with developing their respective engines and accessories, Antique said.
"Additionally, business initiatives like indigenisation of the engine technology by signing MoUs with GE and Safran will enable it to develop a local ecosystem for manufacturing engines. Further LoI with MoD of Argentina to sell light and medium utility helicopters to its armed forces and the successful
completion of this order in the international market will further open up opportunities for HAL's entire product portfolio," Antique said. This brokerage has a target of Rs 5,180 on the stock.
Bharat Electronics
Bharat Electronics reaffirmed its FY24 guidance of 15–17 per cent revenue growth, 21–23 per cent Ebitda margin, and Rs 20,000 crore order inflow. Additionally, the management is confident of achieving a 15 per cent revenue CAGR over FY23–26 supported by the execution of existing small ticket orders along with some larger orders like LRSAM for ships, IACCS, and the Akash system in the near term, Antique Stock Broking said.
"Order pipeline remains healthy for the near to medium term with large ticket orders (INR 500 bn) like QRSAM, MRSAM, LRSAM for NG Corvettes, BMP upgrade, and EW system orders. We continue to like Bharat
Electronics given its robust order book position, strong pipeline, swift execution, and consistent delivery of +20 per cent margin, and thus maintain BUY rating on the stock with a revised target price of Rs 161," Antique said.
Mazagon Dock Shipbuilders
Antique said it continues to remain optimistic about Mazagon Dock Shipbuilders. For the current order backlog, it estimates 27 per cent capacity utilisation in submarine till FY25E as against the optionality of winning new orders (like P75I) and ramping up utilisation to 81 per cent. It said there is Rs 1.3 lakh crore of non-submarine works, where Mazagon Dock Shipbuilders has an upper-hand in winning repeat of P17A and NGD. Besides, there are Rs 10,000 crore-plus medium-life refit orders that will keep the repair revenue intact, Antique noted while maintaining a 'BUY' on the stock.
Bharat Dynamics
Bharat Dynamics, the sole manufacturer of certain missiles, is expected to witness continued momentum in its order book as India lays significant thrust on its indigenous missile development program.
Given that the company is DRDO's production agency, it will maintain steady inflow of orders, and growth will be uninterrupted, Antique Stock Broking said.
"The company has a long term order pipeline in excess of Rs 50,000 crore, providing a strong revenue
visibility. Exports, which is 5 per cent currently, has the potential to grow meaningfully as the Cabinet Committee on Security has approved export of Akash missiles to nine countries. The company aims at 25 per cent revenue from exports in the medium to long term. Given the strong demand for missiles in India and a huge export market, we see BDL posting a strong operational performance over FY23-26E, and hence, we maintain BUY rating with a target price of Rs 1,430," Antique said.
Cochin Shipyard
Antique said Cochin Shipyard should see normalised execution strongly in 2HFY24. The key drivers that have not contributed significantly included Rs 9,800 crore of the NGMV order is yet to move into execution, as it was awarded in Q1FY24; Critical supply chain issues were scheduled in June 2023 for the Rs 5,900 crore. ASW order, which again had no meaningful contribution in FY23/ 1QFY24.
"The spotlight is on IAC-2 or INS Vishal, Antique said. Including the optionality of IAC-2, we retain HOLD rating at a target price of Rs 1,132," it said.
Garden Reach Shipbuilders & Engineers
Antique said Garden Reach Shipbuilders & Engineers can scale up its execution to Rs 5,000 crore per annum. This will aid in accelerating its net profit to Rs 500 crore by FY25E. With Rs 24500 crore in OB (10 times FY23 revenue) expected to conclude by FY27E, the execution trajectory is plausible-however, non-linear, Antique said.
"To chase growth, however, GRSE's dependence on sub-contractors like L&T can keep margins volatile. We maintain BUY with a TP of Rs 934," it said.
MTAR Technologies
MTAR Technologies' majority of its business sectors are characterised by significant barriers to entry, demanding specialized technical knowledge and substantial capital investment. Additionally, these industries have low tolerance thresholds, necessitating precision manufacturing. Consequently, MTAR's extensive decade-spanning experience stands as a valuable asset in these sectors, said Antique Sock Broking.
"The company has a strong order book of Rs 1,100 crore (2x TTM revenue) and aims to take it to Rs
1,500 crore by FY24 end. The company has a revenue target of Rs 830-850 crore in FY24 with consistent EBITDA margin. We like the near-term growth prospects of all its business verticals and the strength of its in-house engineering capabilities. We currently do not have a rating on the stock," it said.