Defence Stock Gives Better Returns Than FDs In 5 Year; Turns Rs 1 Lakh To Rs 4.6 Lakh, 356% Surge; Buy More?

The year 2023 has been broadly fruitful for defence stocks with the order pipeline being robust. Among defence companies is Bharat Dynamics (BDL) which gained by 10.4% in the trading week that ended on December 1st. Not just that BDL has given multi-bagger returns compared to traditional schemes like fixed deposits in 5 years. BDL shares have turned a Rs 1 lakh investment into a corpus of over Rs 4.56 lakh in 5 years, which would come to around 356% returns.

BDL shares have the potential for more upside! In the near term, the stock is seen to rally by 11%. Brokerage Elara Capital has given a buy recommendation on BDL for a target price of Rs 1,360 apiece.

On December 1st, BDL shares ended at Rs 1,225.10 apiece on BSE with a market cap of Rs 22,454 crore. BDL shares' weekly upside is at least 10.43%, while monthly gains come around 18%. Year-to-date the stock has zoomed by 30%. But in 5 years span, the share price has skyrocketed by a whopping 356.11% as of now.

Let's say, those who bought up to Rs 1 lakh worth of BDL shares 5 years ago, are now recording a corpus of more than Rs 4.56 lakh in their portfolio through this defence stock. Five years ago, in the first week of December, BDL shares were below Rs 300 levels.

BDL is also among the high dividend-paying defence stocks. This year, BDP paid interim and final dividends worth Rs 9.35% or 93.50% for the financial year FY23.

According to Elara Capital, Bharat Dynamics (BDL IN) management retains revenue growth of 29% YoY to Rs 32.0bn in FY24 vs our estimates of Rs 35.4bn. BDL regained execution momentum in Q2FY24 with 15% YoY sales growth, partly due to the easing off of supply chain disruption caused by the Russia-Ukraine war. Management expects a strong ramp-up in execution in H2FY24. Revenue is likely to be driven by the execution of the Konkurs anti-tank guided missile (ATGM), emergency orders for Astra Mk1, and Akash missiles in H2. Exports order size Rs 20.9bn is likely to see revenue recognition in FY25.

Elara's note further added that BDL's management expects revenue to peak during FY26-27 amid full-swing execution of large projects, such as Astra Mk1, ATGM, Akash, and exports. It reiterates an EBITDA margin in the range of 20.0-23.0% in FY24 vs our estimates at 21.9%. Given that management missed revenue guidance in FY23, it seems it has been cautious with FY24 guidance, and, in our view, management is being conservative, as a result.

On the valuation, Elara's note said, "We retain our EPS during FY24-26E. We keep our TP unchanged at Rs 1,360 based on 23x September FY25E P/E. We reiterate Buy on a strong inflow trajectory over FY25-27, robust order book of INR 208bn, and rising visibility in the export business. Key monitorable would be the QRSAM order in CY24. We expect an earnings CAGR of 86% during FY23-26E and a ROE of 24% & ROCE of 12% during FY24-26E."

Lastly, the brokerage's note said, "We remain optimistic on the defence indigenization story, supported by the unexplored exports market in the missiles segment. Key risks to our call include lower spending in the defence capital budget, less allocation toward procurement, increased competition from the private sector, and a significant rise in commodity prices."

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.