India’s Defence Sector: Investing in Aatmanirbhar Push

Lock and load! India's defence sector is on a remarkable trajectory, achieving new heights under the government’s Aatmanirbhar Bharat (self-reliant India) initiative. This transformation is being fuelled by a strategic push towards indigenous production, increased capital expenditure, and proactive policies aimed at reducing dependence on imports. 

For investors, the defence sector offers opportunities to diversify their portfolios, with the potential for substantial returns in the coming years.

The Aatmanirbhar Bharat Push: A Catalyst for Growth

India has long been one of the largest importers of defence equipment globally. Several defence stocks have been touching new highs in recent times. The defence euphoria in the market is fuelled by the government's resolve to indigenise defence production and boost defence exports. 

One of the pivotal steps taken under this initiative has been the introduction of 'Positive Indigenisation Lists.' India has so far indigenised 2,920 defence items out of 4,666 listed items. These items include assemblies, sub-assemblies, raw materials, critical spares and components. 

Additionally, the Defence Acquisition Procedure (DAP) 2020 prioritises contracts with Indian firms, thus boosting a more favourable environment for both public and private players in the sector.

Rising Defence Budget and Capital Expenditure

With the government's aim to modernise its armed forces and reduce dependency on foreign suppliers, it has significantly increased its defence budget. In FY 2024-25, the capital expenditure allocation for defence was set at ₹1.72 trillion, representing 27.67% of the total defence budget and 12.9% of the total Budget for the current fiscal, the biggest chunk for a single sector.

Moreover, the Defence Ministry has set a target of $25 billion, or Rs 1.75 trillion, in turnover within the next five years. 

For investors, this consistent rise in defence spending highlights the government's long-term commitment to the sector, ensuring a steady stream of contracts for companies involved in defence production.

Performance of Defence Sector Stocks

To begin with, India's Nifty India Defence index surged 142% in a 12-month period till October 2024, indicating strong investor confidence. 

Besides that, India’s major warship maker and BSE and NSE-listed company Cochin Shipyard's stock price has been on a skyward journey. Its share price has surged about 140% from last year (November 20, 2023) to Rs 1,307 apiece on November 18, 2024. Cochin Shipyard has a current market capitalisation (m-cap) of ₹34,545 crore.

Another listed stock Mazagon Dock Shipbuilder, has given around 101% return in the same period as the stock traded around Rs 3,990.10 apiece and has the latest m-cap of ₹79,227 crore. 

Note: This list of defence stocks was generated on 18 November 2024 and is subject to real-time updates. This data is derived from BSE and NSE.

Disclaimer: Please note that the above list is for educational purposes only and is not recommendatory. Please do your own research or consult your financial advisor before investing.

These gains highlight the broader market sentiment towards defence stocks, which is positive, with investors likely to bet on the sector’s long-term growth prospects.

Key Factors for Investors to Watch

India aims for a turnover of $26 billion in aerospace and defence manufacturing by 2025, supported by infrastructure developments and public-private partnerships. If you're considering investing in India's defence sector, here are some key factors to keep in mind:

Government Policy and Budget Allocations: Keep a close eye on the government’s future budget announcements and policy changes. Increased defence spending and new indigenisation lists can directly impact the growth prospects of defence companies.

Order Backlogs and Execution: Companies with large order books, like HAL and BEL, have shown strong stock performance. However, timely execution is critical. Delays in project deliveries can affect profitability and investor confidence.

Technological Advancements: Defence companies that invest in research and development (R&D) to create cutting-edge products are likely to have a competitive edge. As India aims to become a hub for drones, cyber warfare systems, and space-based surveillance, firms that are ahead in these areas are poised for growth.

Geopolitical Dynamics: Defence is a sector highly influenced by geopolitical factors. Rising tensions with neighbouring countries or increased emphasis on securing borders can result in a surge in government defence spending, directly benefiting local manufacturers.

Private Sector Participation:  The government also promotes public-private partnerships (PPP) to leverage the strengths of both public enterprises and private sector innovation, particularly through collaborations with organisations like DRDO. Additionally, the government’s decision to allow 74% foreign direct investment (FDI) in the defence sector through the automatic route has attracted global players to set up joint ventures with Indian companies. 

Risks to Consider

While the defence sector offers significant upside potential, there are certain risks, such as geopolitical influences and budget constraints.

Dependence on Government Contracts: A significant portion of defence companies' revenues comes from government contracts. Any changes in government policy or delays in contract awards can impact profitability.

Supply Chain Challenges: The sector relies heavily on specialised components, some of which are still imported. Any disruption in the global supply chain could affect production timelines and costs.

High R&D Costs: Developing advanced defence technologies requires substantial investment in R&D. Companies that need to innovate may find it challenging to stay competitive in the long run.

The Road Ahead

The rise of India’s defence sector under the Aatmanirbhar Bharat initiative is a story of strategic transformation and national ambition. However, the need to provide more opportunities to domestic private companies in defence procurement can enhance efficiency, innovation, and competitiveness.

For investors, this sector offers a unique opportunity to be part of India's journey towards self-sufficiency while potentially gaining returns.

Disclaimer: The information provided in this article is for informational purposes only and is not intended as financial, investment, or professional advice. Readers are encouraged to seek independent advice before acting on any information contained in this article. Smallcase Technologies Private Limited disclaims any responsibility for actions taken based on the content of this publication.