A couple of factors including the substitution of expensive foreign inputs, high expenditure as a percentage of GDP and rapid turnaround of order backlog are about to reshape the Indian defence industry which has already delivered robust returns to investors in the past few years.
Take this: shares of key players in the industry have outpaced the benchmark equity indices in the past three years. With a rally of 240 per cent, Hindustan Aeronautics stood as the top gainer in the list. The scrip jumped to Rs 2,481.70 on September 16, 2022 from Rs 730.20 on the same day in 2019. On the other hand, the 30-share BSE Sensex gained 59 per cent during the same period.
Others including Solar Industries, Bharat Dynamics, Bharat Electronics, Garden Reach Shipbuilders & Engineers, BEML and Bharat Forge rallied somewhere between 59 per cent and 231 per cent since September 16, 2019.
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India spent about $77 billion and emerged as the third largest military spender in the world in 2021, amounting to about 3.6 per cent of global expenditure.
While sharing its view on the sector, Antique Stock Broking in a report said, “Times have changed. And the fortunes of the defence industry are about to change as well. The outlook for domestic orders across defence services remains strong. Import dependence is gradually on the wane, which literally translates in to fall in imports, greater absorption of domestic products, and increases in exports.” India is the largest importer of arms in the world and accounts for 11 per cent of the global arms sold.
The brokerage further added that the pricing environment has settled and profitability is expected to be stable across most defence equipment manufacturers.
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For the year ended March 31, 2022, the net profit of the sector spiked by over 50 per cent YoY. Bharat Forge reported a profit of Rs 1,110 crore in FY22 against a loss of Rs 96.99 crore in FY21. Bharat Dynamics, BEML, Paras Defence and Space Technologies, Solar Industries and Hindustan Aeronautics reported over 50 per cent year-on-year growth in the bottom line in FY22.
“We continue to believe in the long-term potential of the Indian defence manufacturing sector. While the sector has witnessed sharp rerating over the past one year, we believe that given the unprecedented growth potential, stocks at 17-18 times FY24E earnings are not stretched by any means,” Antique Stock Broking said. The brokerage has a ‘Buy’ rating on defence majors like Hindustan Aeronautics, Mazagon Dock Shipbuilders, Bharat Electronics and Bharat Dynamics.
Ashwin Patil, Senior Research Analyst, LKP Securities is also bullish on the sector. “Defence sector is buzzing currently on the back of a strong order book, orders from GOI under the Ministry of Defense, technological advancements and requirements according to the geopolitical environment and export orders. This gives us visibility for up to 4-5 years as the country needs to match international standards. Furthermore, profitability led by a higher indigenisation theme, better operating leverage and higher contribution from non-government orders should augur well for the margins. Valuations too seem comfortable to us for the entire sector. Therefore, we are bullish on the sector, particularly on BEL due to additional positives like a lean balance sheet, better working capital management and emphasis on some non-profitable non-defence sectors,” Patil said.