3 defence stocks to buy: Elara bets on Q4 fireworks, says this on GRSE, others

Elara Securities is betting big on Q4 (March quarter) order flows as it believes the defence capex for FY25 is likely to be met despite the recent ordering slowdown. India's defence story is set to unfold in the next decade, led by indigenisation and exports, the brokerage said as it suggested 'Buy' ratings on Hindustan Aeronautics Ltd or HAL (target price: Rs 5,465) and Bharat Electronics Ltd or BEL (target price: Rs 345).

"We raise Bharat Dynamics' target price by 6 per cent to Rs 1,300, on 39 times (from 37 times) September FY26E P/E, given the prospects of strong execution from H2. However, we revise BDL to 'Accumulate' from 'Buy' as the stock has outperformed the Nifty by 18 per cent in the past three months," Elara Securities said.

The brokerage has also raised the SoTP-based target price by Garden Reach Shipbuilders & Engineers Ltd (GRSE) 11 per cent to Rs 1,660, raising the value of core shipbuilding to Rs 1,429, given improved order pipeline, with the order for next generation Corvettes expected soon.

"In the private defence space, we prefer Zen Technologies, Data Pattern and Astra Microwave (all Not Rated)," the brokerage said.

As per Ministry of Defence (MoD), the actual defence capex stands at Rs 1.7 lakh crore in FY25 against Rs 1.72 lakh crore in FY25BE, given that the share of defence spend in April-October at 36 per cent was lower by 700 basis points YoY, Elara is expecting large order inflows to be announced in Q4FY25, including imports of Rafale-M ($4 billion) and MQ-9B drones ($3 billion) along with domestic orders for next-generation Corvettes (Rs 36,000 crore).

Elara noted that MoD awarded Rs 60,000 crore inflows in FY23, on a single day -- March 29, 2023.

"Also, domestic AoN approved through FY23-December 2024 is cumulatively Rs 8.3 lakh crore. Domestic AoN approved through FY13-22 was Rs 5.4 lakh crore. So, cumulative AoN in the past 2.75 years exceeded that in the past decade (FY13-22) by a staggering 53 per cent," it said.

Allocation to domestic companies stands at 75 per cent of the total budgeted defence capex, with the Navy’s budget up 18 per cent YoY in FY25BE, the brokerage said.

Elara said engine woes for HAL may end soon as General Electric (GE) will supply F-404 engines in March.

"Inflows for HAL may jump Rs 1.2 lakh crore in FY26E. Cumulative acceptance of necessity (AoN) in the past 2.75 years (at Rs 8.3 lakh crore) has exceeded that in the past decade (Rs 5.4 lakh crore in FY13-22) by a sharp 53 per cent. So, expect a multifold jump in contract awarding in the next 2-3 years," Elara said.