About a week ago, the defence ministry approved the sixth Positive Indigenization List (PIL) of 780 items, which will further curtail defence imports. The share of imports, which is about 35 per cent of the total defence procurement budget, has come down in the last two to three years.
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NEW DELHI: While a number of bluechips have been sulking in a volatile 2022, defence stocks have been firing on all cylinders. Missile-maker Bharat Dynamics (BDL), which has been below the radar of most brokerages as only a handful of them have coverage on the PSU, has seen its shares more than double so far in 2022.
The government's continued focus on indegenisation and strong order book has been driving the interest in the defence pack.
“Within PSUs, defence stocks are the best to look at. When you look at BDL or HAL, the growth expectation is 25 per cent. While the earnings growth could be lower in the next 2 years, there is a big trigger in terms of visibility improving substantially and also that culminating into revenue growth,” Pankaj Pandey, Head Research, ICICIdirect.com, said.
Confident that the defence sector is going to remain in limelight, he said indigenisation is going up and we will have Rs 5 lakh crore ordering and tendering opportunity.
About a week ago, the defence ministry approved the sixth Positive Indigenization List (PIL) of 780 items, which will further curtail defence imports. The share of imports, which is about 35 per cent of the total defence procurement budget, has come down in the last two to three years.
While import curbs will magnify prospects for small and medium players, foreign interest in fighter aircrafts like Tejas could propel export opportunities as well for HAL.
"We remain positive on the indigenization story and are encouraged by the rising exports pie. We believe small and medium private defence companies such as Data Patterns, MTAR Technologies, Paras Defence, Astra Microwave, Dynamatic Technologies, Taneja Aerospace, etc would likely emerge as key beneficiaries," Elara Securities said.
Analysts also find the valuations of defence PSU stocks attractive. Despite the rally, HAL is still trading at a PE of less than 15x. PSU shipbuilders, whose shares have been in demand, are among the cheapest. GRSE was trading at a TTM PE of 15.9x, Mazagon Dock 10.78x and Cochin Shipyard 8.12x.
In the June quarter, revenues of BDL jumped over 5x followed by 124 per cent growth in Hindustan Aeronautics (HAL) and 80-90 per cent growth seen in Bharat Electronics (BEL), Mazagon Dock Shipbuilders (MDL) and Garden Reach Shipbuilders (GRSE).
"Going ahead, we see a strong revenue visibility for the defence companies looking at the strong order book (at 3-4x TTM revenues for HAL, BEL & BDL while it is at 6-7x for Cochin Shipyard, Mazagon Dock and about 12x for GRSE). Moreover, there is a healthy pipeline of orders that gives more comfort on a longer term basis," ICICIdirect said in a note.
The brokerage's top picks include HAL, BDL and BEL.
Most of the defense companies are now in a phase of rapid transition towards procuring from domestic players, rather going for indigenisation in the wake of the government’s Make In India mission as well as costlier imports.
“This is enabling them to improve their profitability and in turn cash flows while at the same time employ more research and knowledge based employees like engineers and scientists which forms a significant amount of their total expenses,” Ashwin Patil, Senior Research Analyst at LKP Securities said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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