ICICI Direct is bullish on these two defence stocks. Here’s why

Brokerage firm ICICI Direct is bullish on defence sector stocks, especially on Hindustan Aeronautics (HAL) and Bharat Dynamics (BDL). It believes HAL has a big opportunity in both manned and unmanned combat aerial vehicles, helicopters and aero engines while BDL also witnesses significant opportunity with the need for new generation missiles from armed forces.

“We believe that exports hold a big opportunity for Indian defence players led by the expected further increase in indigenisation level of major platforms & systems. With the expected increase in other larger platforms like aircraft, helicopters, vessels, and boats, we believe that India’s export potential in defence is huge and the government’s target of touching Rs 35,000-40,000 crore of defence exports by FY25E (from Rs 12,000-13,000 crore currently) is possible,” said ICICI Direct.

ICICI Direct believes HAL has a big opportunity in both manned and unmanned combat aerial vehicles, helicopters and aero engines. With the development of Kaveri engine variants for different UCAVs, manufacturing of other aircraft engines and maintenance, repair and overhaul (MRO) of these aircraft and engines, the brokerage believes HAL is a multi-year growth story with significant growth potential.

Current order backlog at 3.2x TTM revenues and healthy orders pipeline give strong visibility.

“For combat function, the Indian Air Force is looking for faster induction of unmanned combat aerial vehicles (UCAVs) in the years to come. HAL is in process of developing a combat air teaming system (CATS warrior), which is also an unmanned aerial vehicle for a combat role. The higher version of the Kaveri engine is also under development for the same,” the brokerage said in its report.

Bharat Dynamics also witnessed a significant opportunity with the need for new-generation missiles from the armed forces. The current order book is already strong at 3.8x TTM revenues with a healthy pipeline of orders in new missiles & torpedoes. A high indigenisation level of 80-85% in most missiles and torpedoes offer export opportunities also, said ICICI Direct.

“In terms of missiles & torpedoes, the surface-to-air missile variants like Akash, medium range SAM, and quick reaction SAM are in process of final approvals. Next variants of Astra air-to-air and indigenous anti-tank guided missiles like Amogha and Nag are also under development. Bharat Dynamics is the nominated agency for manufacturing these missiles,” the brokerage said.

The brokerage further added, "The Navy’s big projects in the pipeline give longer-term visibility to defence shipyard companies like Mazagon Dock, Cochin Shipyard and Garden Reach. Moreover, the need for new aircraft for INS Vikrant like a twin-engine deck-based fighter (TEDBF) to be manufactured by HAL. With these new high-tech aircraft & warships, players like Bharat Electronics & Data Patterns will also benefit significantly in the future.”

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