The defence sector has been buzzing on Dalal Street as the government is considering spending $130 billion over the next six years for fleet modernisation across all armed services. Shares of defence players have already delivered robust returns to investors in the past one year. For instance, NIBE Ltd, manufacturer of a wide spectrum of critical components catering to the defence industry, climbed 315% to Rs 1,582.90 apiece on April 5, 2024 from Rs 381.75 on the same day last year. Hindustan Aeronautics and Astra Microwave Products also surged over 150% each during the same period.
India is positioned as the third largest military spender (as of FY23) in the world, with its defence budget accounting for 2.2% of the country’s total GDP. Of late, the industry received over $70 billion in the interim budget for 2024-25.
With the ‘Make in India’ initiative, the government has shifted gears to steer its indigenous defence industry into exports. The exports reached a record Rs 21,083 crore in FY24, up 32.5% against Rs 15,920 crore in FY23. Meanwhile, the government has pegged defence production at $25 billion by 2025, of which $5 bn will be from exports.
According to Nirmal Bang Securities, rising defence spending will stimulate market growth throughout FY24-FY26. “Earlier, the impasse between China and India during the pandemic prompted the government to speed up the indigenisation of military equipment to decrease dependence on imports, facilitating market growth. Even with a sharp run-up in the stock prices of the defence basket (Nifty India Defence index 6m returns- 37%); our outlook on the sector remains optimistic due to the visibility into long-term execution growth supported by a strong order book and a healthy pipeline,” the brokerage said.
Based on the attractive risk-reward ratio, Nirmal Bang Securities prefers Mazagon Dock Shipbuilders, Bharat Dynamics and Astra Microwave. Shares of Bharat Dynamics and Mazagon Dock Shipbuilders have gained 81% and 218%, respectively, in the last one year. On the other hand, the benchmark BSE Sensex gained 24%.
Nirmal Bang Securities has a ‘Buy’ call on Bharat Dynamics with a target price of Rs 2,045. It is also positive on Mazagon Dock Shipbuilders (Target price: Rs 2,786), Astra Microwave Products (Rs 776).
Vaishali Parekh, Vice President-Technical Research, Prabhudas Lilladher is bullish on Paras Defence. “The stock has corrected quite well and has taken support near 610 levels forming a double bottom formation on the daily chart, thereafter witnessing a pullback to improve the bias. The RSI has recovered from the oversold zone to indicate a trend reversal signalling a buy. With the chart looking attractive, we suggest buying and accumulating the stock for an upside target of 760 and 820 levels in the coming days keeping the stop loss of 605 level,” she said. Paras Defence has gained nearly 46% in the last one year.
According to Antique Stock Broking, orders remained healthy with multiple big-ticket orders being finalised in FY24, helping defence companies to further bolster their robust order book and setting the stage for FY25. BEL reported Rs 35,000 crore (up 72% YoY) order inflow whereas HAL reported Rs 42,100 crore (up 62% YoY), helping them build a robust order book position and setting the stage for reporting strong FY25 operational performance.
“We continue to remain positive on India’s defence story and maintain a ‘Buy’ rating on HAL with a target price of Rs 3,618, BEL with a revised target price of Rs 234, Bharat Dynamics with a target price of Rs 2,038 and Garden Reach Shipbuilders Engineers with a target price of Rs 962,” Antique Stock Broking said in a report.