60-200% Gains In 2023: 7 Defence Stocks To Defend Your Portfolio In 2024; Hal, Mazagon, L&T, BEL In List

Defence stocks are expected to continue to energize even in 2024. After a remarkable transformation in 2023, defence stocks are seen as the rising phoenix of the new year. Brokerage Antique Stock Broking expects the defence equipment sector to post order inflow CAGR of 29% from the earlier 10%. Meanwhile, the sector's revenue and earnings are expected to grow at a CAGR of 17% from 16% earlier and 15% from 13% earlier), respectively.

In FY23, defence companies' order inflow climbed by a huge 25%, and growth was witnessed across the board. Antique's note said, "We expect defence to post revenue CAGR of 17% over FY23-26E. We believe that with a growing order book, a healthy order pipeline and strong government focus on indigenisation, there can be an upside to revenue growth assumptions."

Accordingly, the brokerage has recommended buying in seven defence stocks. These are mid-to-largecaps namely Hindustan Aeronautics (HAL), Bharat Dynamics, Bharat Electronics, Mazagon Dock Shipbuilders, Garden Reach Shipbuilders & Engineers (GRSE), BHEL, and Larsen & Toubro (L&T).

Here's what Antique Broking said about these seven stocks and sets its latest target prices:

1. BHEL:

The brokerage expects BHEL to experience a significant turnaround in its ordering cycle in the coming 3-4 years. The accompanying growth will be driven by non-power and power segments.

It expects BHEL's total order intake to surge to Rs 1.8 trn during FY24-26, which is nearly thrice the orders in the three years preceding FY24.

That being said, Antique's note added, "We expect BHEL to report an average annual order intake of Rs 600 bn during FY24-26E, >2x its long-term average of INR 274 bn booked during FY12-23. Despite strong execution, we project the order book to rise to an all-time high of INR 1.8 trn. Earnings could grow exponentially over the next three years, given strong operating leverage. We maintain BUY on the stock with a revised target price of INR 230, based on 26x FY26E earnings."

Taking into consideration the target price, BHEL shares have a potential upside of nearly 19% ahead. In 2023, BHEL shares have skyrocketed by a whopping 141.51% on BSE. Currently, the stock is at Rs 193.45 apiece.

2. Larsen & Toubro (L&T):

This infra giant is strongly positioned to benefit from the investment cycle and is best placed to take benefit of the capex revival theme given a) Enjoys preferred E&C player status in India given its capability to handle complex projects b) recent measures to improve operational efficiency by monetizing noncore assets, improving working capital cycle and reducing capex.

Antique's note said, "We retain our Buy rating on the stock with revised SoTP target price of Rs 4,214 valuing the standalone and hydrocarbon business at 28x FY26E EPS, LTI Mindtree at 28x FY26E EPS, LTTS at 30x FY26E EPS and LTFS at 3x FY26E BV."

The current target price implies up to 19.5% potential upside in L&T shares ahead. In the year 2023, L&T stock rallied by a huge 68.86% on the BSE. Currently, the stock price is at Rs 3,527.05 apiece on the exchange.

3. Hindustan Aeronautics (HAL):

As per Antique's note, India is modernizing its armed forces due to (1) obsolescence and (2) the geopolitical situation. The Indian armed forces' order pipeline looks robust with orders worth INR 2 trillion expected to be placed by 2030. India intends to have 42 squadrons, against the current 32, while the IAF is keen on working on it by inducting new aircraft, including new generation fighters. Simultaneously, the country is also eager to develop the indigenous defence industry. Given this scenario, we expect HAL to play a pivotal role in this endeavour on the back of its strong capabilities and credibility.

Hence, the brokerage believes that HAL with its long-term business outlook and strong execution capabilities is well on track to report a 6% earnings CAGR over FY23-26E. Given the multi-year double-digit earnings growth potential and robust return ratio profile of +20%, the brokerage believes that the stock is attractively valued. Thereby, it has maintained a BUY rating with a revised TP of Rs 3,615, based on 35x FY26E earnings.

In consideration of the current market price, HAL shares have the potential of nearly 29% upside ahead. In 2023, the stock rallied by a massive 120.70% despite its stock split in the year. On BSE. the stock is currently at Rs 2,803.50 apiece.

4. Bharat Dynamics (BDL):

BDL is expected to witness continued momentum in its order book as India lays a significant thrust on its indigenous missile development program. Given that the company is DRDO's production agency, it will maintain a steady inflow of orders, and growth will be uninterrupted. The company has a long-term order pipeline in excess of Rs 500 bn, providing strong revenue visibility. Exports, which are 5% currently, have the potential to grow meaningfully as the Cabinet Committee on Security has approved the export of Akash missiles to nine countries.

Also, BDL aims s at 25% revenue from exports in the medium to long term. Given the strong demand for missiles in India and a huge export market, the brokerage sees BDL posting a strong operational performance over FY23-26E.

It added, "With strong operational performance expected to play out over FY23-26E (revenue CAGR of 29% and earnings CAGR of 49%), we maintain BUY rating with a revised target price of INR 2,038 (32x its FY26E EPS)." This would imply a nearly 19% upside in BDL shares ahead.

In 2023, the stock jumped by nearly 81.6% on BSE. Currently, the stock is at Rs 1,713.15 apiece.

5. Bharat Electronics (BEL):

BEL is the key electronic system integrator for the defence services, providing state-of-the-art electronic products and systems for the Army, Navy and Air Force.

With a robust order book of Rs 809 bn (4.5x its TTM revenue) in place and an equally robust order pipeline (Rs ~500 bn) expected to materialize in the near to medium term, BEL is well on track to register earnings CAGR of 19% over FY23-26E. Also, BEL has traded at a discount as compared to other large-cap industrial companies, given concerns on a) sustainable operational growth and b) scepticism on the sustainability of 20%+ operating margin under the new pricing policy impacting PBT margin.

The brokerage maintained a BUY rating on the stock with a target price of Rs 221 (32x FY26E EPS). This would imply over 20% potential upside in BEL shares ahead.

BEL's stock price zoomed by nearly 84% on BSE in 2023. Currently, the stock is at Rs 184.10 apiece.

Mazagon Dock Shipbuilders:

Mazagon Dock was among the favourite picks of 2023 in the defence basket, and brokerage Antique continues to be optimistic about the company.

For the current order backlog, the brokerage estimates 27% capacity utilization in submarine till FY25E as against the optionality of winning new orders (like P75I) and ramping up utilization to 81%; second, there is Rs 1.3 trn non-submarine works, where MAZDOCKS has an upper-hand in winning repeat of P17A and NGD; and third, there are Rs 100 bn+ medium-life refit orders that will keep the repair revenue intact.

Including a step-up capacity utilization in the submarine segment by adding the P75 (I) order, the brokerage said, "We could argue for an even higher TP. However, we choose to remain conservative. With #3 units of the Scorpene class add-on orders, we forecast a 21%/ 24% CAGR for revenue/ net profit over FY23-26E. We retain BUY rating with a TP of Rs 2,833 (20x FY26 EPS + cash+ optionality for P75I)."

Antique's target price signals over 24% potential gains in Mazagon Dock shares ahead. In 2023, Mazagon Dock recorded the most upside of over 189% on BSE in the defence segment. Currently, the stock is at Rs 2,280.30 apiece.

Garden Reach Shipbuilders & Engineers (GRSE):

GRSE can scale up its execution to Rs 50 bn per annum. This will aid in accelerating its net profit to Rs 3.8 bn by FY26E. With Rs 237 bn in OB (~10x FY23 revenue) expected to conclude by FY27E, the execution trajectory is plausible-however, nonlinear. To chase growth, however, GRSE's dependence on sub-contractors like L&T can keep margins volatile.

Further, the brokerage's note said, "We foresee GRSE clocking Rs 50 bn in FY25E and Rs 51 bn revenue in FY26E. The execution has higher upside risks, as most of the vessels are in between 40%-60% physical progress, where a higher share of execution is expected in the bell curve of construction. We foresee GRSE clocking 27% CAGR in revenue and 19% CAGR in net profit during FY23-26E. We maintain a BUY rating with a revised TP of Rs 1,005 (25x for core FY26 EPS+ cash on books at a discount)."

The target price implies a nearly 15% upside in GRSE shares ahead. In the year 2023, the stock price gained by over 82% on BSE. Currently, the stock is at Rs 874 apiece.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.