Even as the NSE India Defence index has corrected 21 per cent from its July 2024 peak, Antique Stock Broking on Friday said India defence story has not diminished, rather the outlook has further improved giving significant earnings visibility.
Valuation, given earnings trajectory, are not unreasonable and the recent correction provides meaningful opportunity to accumulate defence stocks, it said while staying positive on stocks such as Hindustan Aeronautics Ltd, Bharat Electronics Ltd (BEL), Bharat Dynamics Ltd (BDL), Mazagon Dock Shipbuilders Ltd and PTC Industries Ltd.
Antique noted that Indian defence sector has given several multibaggers during the past three years, with stocks rising by a whopping 3-4 times to 8-10 times between September 2022 and July 2024, before correcting from peak in July 2024.
It said three execution hurdles will likely get solved soon. In the case of Hindustan Aeronautics, sources suggest that HAL is expected to receive first batch of two F-404 engine in next few months, the brokerage said. The commencement of supply of engines from GE Aviation is crucial for delivery of India's indigenous light combat aircraft (LCA), Tejas Mk1A.
For Bharat Dynamics, the delivery of Akash Weapon System -- Order received in March 2023, value Rs 8,161 crore to the Indian Army has been delayed, presumably due to delayed in supply certain critical components. Antique Stock Broking believes the situation is moving towards normalcy.
In the case of Mazagon Dock Shipbuilders, the brokerage is expecting award of three additional Kalvari-class submarines, with a potential value Rs 35,000 crore. The finalisation of P75I, 6 of AIP class submarines is on the horizon, it said.
The brokerage noted that shortage of titanium and super alloy castings, crucial for aerospace industry, is facing massive supply crunch due to limited supplier base and high-end technological entry barriers.
"PTC Industries is setting up India's first and World's largest single location titanium melting, forging and casting facility at Defence Industrial Corridor, Lucknow, and is expected to emerge as a critical supplier of these materials to global aerospace industry. This will also go long way in making India self-reliant," it said.
India's defence exports have increased 30 times over FY14-24 from Rs 690 crore to Rs 21,080 crore with 60 per cent of the contribution coming from the private sector and the balance 40 per cent from defence PSUs. The target is to further increase defence exports to Rs 50,000 crore by FY29. Exports are happening in mission-critical weapon systems like missiles - BDL getting order for Akash and Brahmos missiles.
Antique Stock Broking said defence PSUs may benefit immensely as Ministry of Defence (MoD) goes on an order finalisation. It noted that MoD has placed multiple large-ticket orders with defence PSUs which has helped defence PSUs like BEL, HAL, and BDL to further bolster their already strong order book and meaningfully increase revenue visibility for years to come.
Recently, large-ticket orders like the Sukhoi engines and SU-30 MKI (INR 400 bn order) were finalised and Antique believes awarding will stay elevated in 4QFY25 leading to a sharp improvement in visibility of key defence companies
"We continue to believe in the robust ordering prospects which is expected to play out in the medium term as India looks to modernize its armed forces and also scale up exports with emphasis on Make in India. We maintain our positive stance and BUY rating on BEL (target of Rs 373), HAL (target of Rs 5,902), BDL (target of Rs 1,357), Mazagon Dock (target of Rs 5,513) and PTC (target of Rs 19,653)," it said.
Mazagon Dock got split into face value of Rs 10 per share into shares with face value of Rs 5 per share.