3 defence stock ideas from ICICI Securities after Q2 results

Defence stocks have been on investor radar in 2022 amid a strong order pipeline. While maintaining its positive outlook on the sector, domestic brokerage firm ICICI Securities said it likes BEL, HAL and Astra Microwave.

The brokerage said it is bullish on the sector because the orderbook is expected to grow for all companies, margins are expected to expand on sourcing efficiencies, focus on enhancing exports, and peak earnings are expected for naval shipyard companies by FY25.

Hindustan Aeronautics
“EBITDA margin increase in H1FY23 was led by drastically lower LDs (down by Rs 800-850 million) and lower warranty expenditure owing to a higher proportion of RoH segment. Expect EBITDA margin to sustain at 26-27% despite manufacturing picking up from FY25 owing to internal cost efficiencies,” ICICI Securities said in its report.

“Current orderbook stands at Rs 840bn. There has been an inflow of Rs 8.6bn from the contract for the end-to-end realisation of 5nos. PSLVs (in consortium with L&T) over a period of four years. Also, the recently executed contract for 70nos. HTT40 has added Rs 68bn to the orderbook,” it added.

ICICI Securities maintained a buy on Hindustan Aeronautics with a target price of Rs 3,170, which shows an upside potential of 16% from the current market price of Rs 2,734 per share.

Bharat Electronics
“FY23 revenue growth guidance reiterated at 15%. The lower end of EBITDA guidance was raised to 22-23% from 21-23% earlier. Order inflow guided at Rs 200bn each in FY23 and FY24,” the brokerage said.

“Management expects order-booking of Rs 150 billion- 200 billion each year in FY23 and FY24 based on government’s Himshakti programme envisaging investment of Rs 33 billion, Atulya medium power radar order worth Rs 20 billon-30 billion orders worth Rs 100 billion from naval shipyards, and orders for Akash Prime for two squadrons of Rs 30 billion-40 billion,” it said.

ICICI Securities maintained a buy on Bharat Electronics with a target price of Rs 125, which shows an upside potential of 17% from the current market price of Rs 107 per share.

Astra Microwave
“Margins improved substantially on the back of higher domestic sales. In Q2FY23, domestic sales were 72%, and exports were 38%. The current order book comprises 68% domestic orders, and the rest is exports; orders are executable in the next 12-30 months. Order inflow of Rs 3,400 million in Q2FY23 includes Rs 2,400 million for radars, Rs 800 million for EW (electronic warfare), Rs 50 million in missile electronics and Rs 100 million for meteorological (weather) & space segments,” the brokerage firm said.

“In Q3FY23, the company expects Rs 2 billion in sales in which defence is likely to contribute 70% and the rest from others. Also, AMW is expecting Rs 8.5 billion of revenue in FY23 and Rs 10 billion in FY24 (aspirational),” the brokerage added.

ICICI Securities maintained a buy on Astra Microwave with a target price of Rs 380, an upside potential of 20% from the current market price of Rs 317 per share.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)