'Make in India' initiative gives these defence stocks a shot in arm

NEW DELHI: A number of defence-related stocks are in focus these days, with the Ministry of Defence (MoD) notifying the third positive indigenisation list comprising 101 weapons, systems, platforms and equipment.

This list, as analysts pointed out, builds on the the first list of 101 items and the second list of 108 items that were promulgated in August 2020 and May 2021, respectively. Bharat Electronics has emerged as their top pick in the space, followed by Hindustan Aeronautics (HAL) and Bharat Dynamics (BDL).

Shares of BDL have soared 93 per cent year-to-date. HAL is up 35 per cent so far this year while BEL has climbed 15 per cent during the same period against a 1 per cent drop in the BSE Sensex.

In the possible count of order inflows, BEL leads the list with 24 probable order accruals, followed by 11 of L&T and 10 of Solar Industries, said ICICI Securities in a note.

"Higher capital budget and higher thrust toward indigenisation will allow for better orderbook and execution visibility over an extended timeframe and better working capital dynamics. Both are a recipe for return ratio improvement and multiple expansion," the brokerage said while reiterating HAL and BEL as its top picks in the sector.

The brokerage has raised its target price on BEL to Rs 300 per share, valuing it at 25 times FY24 P/E now from 20 times earlier.

As per analysts, orders worth more than Rs 2,10,000 crore are likely to be placed in the next five years as part of the items covered in the third list as per the MoD. Since the notification of the first and second lists, contracts for 31 projects worth Rs 53,900 crore have been signed by the armed forces.

Acceptance of Necessity (AoNs) for 83 projects worth Rs 1,77,300 crore have been accorded. In addition, cases worth Rs 2,93,700 crore will be progressed in the next 5-7 years, they said.

Rahul Shah of Motilal Oswal Financial Services said that most defence companies are from the PSU pack, where a re-rating is visible.

"If I look at companies like BEL, Bharat Dynamics (BDL), HAL all of them have been on fire since last month or so. Obviously, the order inflow has supported them. They were available at a very reasonable valuation. The top league which if I have to put an investment in, would include BEL as the top pick followed by HAL and BDL. These three stocks remain on top of my mind. But in the largecap space, if I have to look at the way the stocks have performed, BEL has more potential from here from the current levels and followed by HAL and BDL," Shah said.

Sandip Sabharwal of asksandipsabharwal.com says, it is a question of identifying the right set of companies. The better strategy for people who want to play defence is to have a couple of stocks from the PSUs pack and also a couple of stocks from the private sector after doing their own analysis, Sabharwal said.

"Then have a combination of three-four stocks because some of these companies could actually be disproportionate beneficiaries," he said.