HAL, BEL, Mazagon Dock & Bharat Dynamics: Defence stocks to buy or sell; check price targets

Defence stocks including Hindustan Aeronautics Ltd, Bharat Electronics Ltd, Bharat Dynamics Ltd, Mazagon Dock Shipbuilders Ltd and others have been hit hard, correcting up to 50 per cent, amid the current weak sentiments of broader markets, consistent FII outflows and muted Q3 earnings from the sector's companies.

Reiterating their positive view, analysts said that the defence sector is poised for significant growth as it transitions from a purely strategic domain to a key economic driver, contributing to national development. The 'Atmanirbhar Bharat' initiative has played a crucial role in reducing dependence on foreign OEMs by promoting indigenous procurement of defence equipment.

However, domestic brokerage firm Choice Broking said that state-run defence players performed better than the private peers on various financial metrics in Q3FY25 as the quarter underscored the resilience of defence PSUs in managing global challenges, while private players struggled with operational inefficiencies and supply chain issues.

Defence PSUs demonstrated 25.3 per cent YoY revenue growth and an Ebitda margin expansion of 140 bps to 32.4 per cent, driven by strategic long-term raw material contracts and effective cost-control measures, said Choice Broking. "PAT increased by 28.7 per cent, with a marginal margin improvement of 56.3bps, despite supply chain disruptions caused by ongoing conflicts".

On the other hand, private defence companies faced execution delays and supply constraints, resulting in 7.5 per cent YoY and 7.4 per cent QoQ revenue growth, while Ebitda improved by 3.1 per cent YoY and 35 per cent QoQ. However, Ebitda margins contracted 88.7bps YoY, improved by 423.7bps QoQ, the brokerage added.

In FY24, domestic defence turnover totaled Rs 1.28 lakh crore, with the private sector accounting for 22 per cent and the public sector accounting for the remainder, said Nirmal Bang Institutional Equities. Exports account for Rs 2,100 crore of the overall sales of Rs 1.28 trillion, or 2 per cent, and are driven mainly by private firms, it said.

"Defence PSUs received 80 per cent of project awards through nominations, while private players received the remainder. However, the government is implementing many steps to level the playing field by transitioning from a nomination to a more competitive form. India has a few testing centers, but the government plans to increase the number," Nirmal Bang added.

Continued government support for defence PSUs and private players is expected to foster a self-sustaining defence industry over next 5-10 years. Most defence companies maintain a robust order backlog, execution remains a key concern. Rich valuations, driven by stretched multiples, continue to be a challenge, though recent market corrections provide some cushion, Choice said.

"The sector is anticipated to witness substantial investments, acquisitions of advanced platforms, and modernization of existing systems, leading to increased production and dispatches," the brokerage added. However, it cautioned tha industrial plays may face further downgrades if earnings or order inflows fail to meet expectations.

Choice Broking has suggested to buy Astra Microwave Products (TP: Rs 980), Apollo Micro Systems (TP: Rs 156), Azad Engineering (TP: Rs 2,150), Bharat Electronics (TP: Rs 370), Data Patterns India (TP: Rs 2,450 ) and Hindustan Aeronautics (TP: Rs 5,000). It has a hold rating on Bharat Dynamics (TP: Rs 1,190) and DCX Systems (TP: Rs 317). However, it has suggested to sell Centum Electronics (TP: Rs 845).

Nirmal Bang Institutional Equities upgraded Mazagon Dock to 'buy' from 'hold' with a target price of Rs 2,605. It also has 'buy' ratings on companies like Hindustan Aeronautics and Paras Defence and Space Technologies Ltd with target price of Rs 4,655 and Rs 1,187, respectively. Another domestic brokerage, ICICI Direct has a 'buy' rating on Astra Microwave with a target price of Rs 890.